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Yields on Japan's benchmark 10-year government bond hit zero for the first time, as investors clamor for safe-haven assets in the wake of a global market rout

The yield on the 10-year Japan government bond (JGB) recovered to 0.015 percent after touching zero on Tuesday. The fall came on the heels of a global stock market sell-off overnight that likely spurred safe haven flows back into Japan. Bond prices move inversely to yields.

The US five-year Treasury yield also fell to around 1.1144 percent in Asia trading hours, its lowest since June 2013, when markets convulsed during the taper tantrum after the US Federal Reserve first broached the idea that it would be tapering its quantitative easing program. The US 10-year Treasury yield was around 1.6947 percent, a more than one-year low.

The 10-year JGB's move to zero yield also follows the Bank of Japan's (BOJ) move to a negative interest rate policy, which makes the return on JGBs, even at a zero yield, as well as the possibility of further price rises more attractive.

The 10-year JGB yield has so far managed to avoid falling into negative territory but analysts expect that to happen soon.

Deutsche Bank last week forecast 10-year JGB to trade in a range of negative 0.05 to positive 0.15 percent for the time being. Capital Economics tips the bond yield to fall to negative 0.25 percent by the end of 2016.

Yields on shorter-dated bonds are already negative in Japan, as well as in many countries in the euro zone, where the European Central Bank has flooded financial markets with cash. Nearly 70 percent of the JGBs in the market already offer negative yields, the Nikkei Asian Review reported last week.

However, a yield below zero on 10-year bonds is rare. Switzerland 10-year bonds currently yield negative 0.28 percent, although the country's bond market is smaller than Japan's.

A negative yield on a bond - which means investors are effectively paying for the privilege of lending Japan's government money - suggests continued strong demand for JGBs.

The latest driver for the rally in bond prices (and the decline in yields) was the January 29 move by the BOJ to adopt negative interest rates for the first time. The central bank said it would apply a rate of negative 0.1 percent to excess reserves that financial institutional held with it, effective February 16.

That nontraditional policy change may also be unsettling markets.

"I think that central banks are re-writing the Econ textbook. The problem is its unclear how this story ends, but history would suggest this is not a sustainable trend," said hedge fund manager Brian Kelly of BKCM LLC.

A decline in assets perceived to be risky such as stocks and commodities has also sent investors scurrying into JGBs, which are considered a safe-haven asset.

First Published:Feb 9, 2016 9:27 AM IST