Drift towards safe haven assets picks up pace

Japanese bond yields hit Zero; Gold continues to gain


Photo: Reuters
Photo: Reuters

Mumbai: Investors have been nervous ever since the turn of the year. After a brief period of calm, volatility returned to the markets even before new year celebrations could fade and it hasn’t receded since.

On Tuesday, yield on the 10-year benchmark Japanese bond turned negative for the first time ever. Bond yields in Japan were first driven lower after the Bank of Japan made a surprise move to adopt a negative interest rate policy on 29 January. But even as yields have fallen, investors have continued to buy into sovereign bonds of Japan, perceived to be a safe haven asset, driving yields to zero. Bond yields and bond prices move inversely.

Essentially, this means, that if you park your money in Japanese government bonds, you get nothing for it. But that isn’t deterring investors who continue to shun risk and move towards safe haven assets.

In a comment on microblogging site Twitter, Uday Kotak, chief executive officer of Kotak Mahindra Bank Ltd said, “Japan 10 year bond yield 0. Signals protection of capital. Long ago I was taught that return of capital more important than return on capital!”

To be sure, Japanese government bonds are not the only asset class gaining in the current volatile scenario. Most assets seen as so-called safe haven investments have seen a move-up in the six weeks or so since the start of January.

For instance:

• The US 10-year bond yield has dropped 58 basis points from 2.27% at the start of January to 1.69% now

• The German 10-year bond yield has fallen 41 bps from 0.63% to 0.22% now

• Even left-for-dead gold has gained 12.28% from $1061.42 /oz to $1191 /oz

In return, risk assets, particularly equities, continue to slide.

The MSCI emerging market index has slipped 7% since the start of January, reflecting one of the worst starts to a new year in a while. Even developed market equity indices haven’t been spared and the US and European markets continue to see renewed selling pressure each time a new stress point emerges. Many world markets are flirting with bear market territory, which is defined as a 20% fall from peak levels over a short period of time.

Overnight, the US and European markets fell as banking stocks plunged. Shares of Deutsche Bank AG fell almost 10% in Europe after credit default swaps (CDS) on the bank’s debt surged. A CDS represents the cost of insuring against a default on debt securities issued by an entity. Deutsche Bank led other bank stocks across Europe and the US lower and most lenders took a knock in trade on Monday.

The global jitters continue to reflect on the Indian markets too. The benchmark Sensex is now down 8% since the start of January with foreign investors selling a net of $1.8 billion in domestic equities. The Indian currency, the worst performing in Asia since the start of 2016, is down 3%.

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