Taiwan Is Doing Everything Possible to Avoid Negative Yields

(Bloomberg) -- As the world’s pile of negative-yielding debt rose to a record $18 trillion in December, authorities in Taiwan were working hard to keep the government’s bond yield above zero.

That month, the central bank sold a net $14 billion worth of certificates of deposit to commercial lenders, the most since early 2012. Its issuance helped mop up liquidity by tying up excess cash in the financial system. Had the central bank not stepped in and done this, “Taiwan government bond yields would have already gone negative some time ago,” said Baker Tu, a bond trader at Capital Securities Corp.

Taiwan authorities have been taking seriously the potential for sub-zero rates -- a situation where investors lose money if they hold the securities to maturity. As the 10-year yield dropped to a record low of 0.24% in late November, the Taipei exchange reviewed the capacity of its bond-trading platform to handle negative yields, according to deputy chief executive officer Chou Hui-mei. The over-the-counter mechanism would allow for such pricing if required, she said.

The yield on long-term Taiwanese government debt has never gone below zero. Central bank governor Yang Chin-long has previously said negative interest rates would adversely affect bank profits. Taiwan’s lenders own about 58% of the government’s outstanding bonds, according to December data.

Yang has garnered attention for his so-called “smoothing” of the local dollar, generally considered intervention elsewhere. In a rare public appeal on Thursday, Taiwan’s central bank asked “everybody” - widely interpreted as being directed at manufacturers and exporters - to refrain from selling U.S. dollars in order to maintain the local forex market’s stability.

While Yang has not explicitly said the bank was using certificates of deposit to mop up liquidity and uphold yields, he did say last April after cutting the interest rate to a record low 1.125%, “I hope we don’t hit zero.”

Negative yields would also impact Taiwanese insurers, who have struggled to find suitable investments for their NT$927 billion ($33 billion) pile of bank deposits -- the largest since at least 2011. The industry holds almost 14% of the government’s debt, according to central bank data. Taiwanese insurers have limited overseas investment options because regulators control their foreign-currency exposure.

The problem would be so significant for the financial industry that Taiwan in December told insurers and banks to conduct stress tests to show how a low interest-rate environment would affect their businesses.

A representative for the central bank’s banking department declined to comment on the December open-market operations when contacted by phone on Thursday.

Certificates of deposit are the main policy tool for Taiwan’s central bank to keep market liquidity at a desired level. In its open market operations, the central bank sells them to commercial banks to subtract money from the market, and lets them mature when it wants to inject liquidity.

(Updated with central bank comments in fifth paragraph)