Japanese buy corporate bonds due to weak yen

Japanese investors are snapping up Korean corporate debt at the same yields as sovereign notes using cash pumped into the system by the Bank of Japan (BOJ).

Korea South-East Power sold 100 billion won ($92 million) worth of three-year notes with no premium over similar government bonds on Oct. 30. A Japanese bank bought all the bonds in the unit of state-backed Korea Electric Power Corporation, people familiar with the sale said.

The inflow looks set to accelerate after the BOJ’s Oct. 31 surprise expansion of its monetary stimulus drove yields in Japan to the lowest since April 2013 and sent the yen to a six-year low versus the Korean won. The 2.33 percent average yield on Korean AA notes compares with 0.16 percent for similar-rated Japanese debt, and supply is limited as President Park Geun-hye curbs offerings by state-owned enterprises.

“Japanese investors’ funding costs might have been very low at home, which may enable them to buy Korean corporate bonds with a fair return,” said Kim Eun-gie, a credit analyst at NH Investment & Securities. “They prefer SOEs or high-quality, well-known names, whose domestic ratings are AA or above, such as Kepco’s affiliates, LG and Lotte Group.”

Korea South-East Power, rated AAA locally, also sold 110 billion won of five-year securities at 4 basis points over the sovereign on Oct. 30. The average yield premium for Korean three-year won bonds rated AA- fell to 28.9 basis points Oct. 30, the lowest since February 2007.

Korea Expressway, after ditching plans to sell offshore dollar bonds on Oct. 27, raised 170 billion won selling 20-year won-denominated securities on Oct. 30 at 2.956 percent. Similar-maturity government bonds yielded 2.87 percent on the day.

SK Telecom, Korea’s No. 1 mobile-phone operator whose local rating is AAA, raised 500 billion won on Oct. 28 selling five-, seven-, 10-year notes priced to yield 2.526 percent, 2.658 percent and 2.818 percent respectively, the company’s lowest borrowing costs yet for similar paper.

Japanese megabanks Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group increased overseas loans an average 64 percent to 66 trillion yen ($574 billion) in June from March 2012, versus average growth of 14 percent in their combined loan books, according to Francis Chan, a Bloomberg Intelligence analyst.

“Japanese investors have been taking part in Korean corporate bond sales because they may offer better returns amid a weakening yen,” said Kim Sang-hun, a credit analyst at Shinhan Investment Corporation. “We expect the domestic corporate premium to be kept low next year considering there’s very little chance of credit events or increasing supply.”

Combined loans at all Japanese bank branches in Korea almost doubled to 17.9 trillion won in the four years through 2013, Financial Supervisory Service data show.

Bloomberg