Negative yields in the short end of the curve are being heavily bid in by institutional investors wanted to arbitrage and grab high relative USD yields. These is because as the expected moves by the Federal Reserve in the short term and the US government fiscal expansion policies in the medium term are boosting the USD yields in the short end of the curve making high demand for US dollars for international investors.
This high demand, in turn gets translated into a large USD/JPY currency basis spread, used to hedged dollar payments into/from yens. So for example, foreign investors are going long a 3 year yen denominated government debt (JGB) with a yield of around -0.18%, and swaping those yens into dollars (ie. long US dollar payments and short yen payments) clinching a net spread of 0.78%, and thus securing a 0.6% net USD yield.
As this trade is usually done on the short end of the JGB curve to avoid credit and duration risk, is becoming ideal not only for hedge funds and other speculators but also for institutional money market players and central banks. This trend can eventually provide long term support for short term yen denominated assets, facilitating the curve steepening efforts of the central bank of japan by targeting its monetary easing on the longer yields. Eventually large companies with dollar funding needs may also begin to issue short debt denominated in yens.
