Long‐term interest rates under negative interest rate policy: Analysis of Japanese government bond and swap markets

Abstract

AbstractMarket segmentation is observed in the Japanese government bond (JGB) and swap markets of 2‐, 3‐, 4‐, 5‐, 7‐, and 10‐year maturities under negative interest rate policy regime. This also means that the arbitrage between the JGB and swap markets does not work in these maturities. After the Bank of Japan introduces a yield curve control policy under negative interest rate policy, market segmentation is observed only in the JGB and swap markets of 7‐ and 10‐year maturities. In the maturities of 2, 3, 4, and 5 years, the JGB yield and the swap rate co‐move. The market function recovers and arbitrage works between the JGB and swap markets in these maturities.