Bond risk in Japan falls to lowest mark since ’08

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Bond risk in Japan falls to lowest mark since ’08

Japan’s corporate bond risk has fallen to the lowest since 2008 versus Asia’s benchmark, as Bank of Japan monetary easing outweighs concern over a widening conflict in Syria and regional capital outflows.

The Markit iTraxx Japan index of default swaps for 50 investment-grade borrowers declined 5.2 basis points this month to 95.1 as of yesterday, compared with a 14 increase to 160.5 for the Asian gauge, which also includes sovereign contracts, according to data provider CMA. The gap was the widest in more than four years at 71.9 on Aug. 27.

Nomura Securities forecast this week that the Japan index will fall to 60 basis points by March, as investors focus on BOJ revival policies rather than the Federal Reserve paring stimulus or a possible strike against Syria by U.S. and allied forces. Governor Haruhiko Kuroda’s unprecedented bond buying to end 15 years of deflation drove an 11 percent drop in the yen against the dollar this year, boosting profit at companies from Panasonic to Toyota Motor.

“Japan is removed from concerns about American tapering, because it’s undertaking its own easing program, the likes of which we’ve never seen before,” said Hiroaki Hayashi, who oversees 1.6 trillion yen ($16 billion) of fixed-income investments as a general manager at Fukokushinrai Life Insurance in Tokyo. “For Asia, the looming withdrawal of liquidity unleashed by Fed’s stimulus is the main factor” behind the climbing risk, Hayashi said.

Asian concerns

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan rose to 170.3 basis points Wednesday, a two-month high, as tension increased over possible military action in Syria, CMA data show.

The U.S. and France are stepping closer to a military strike against Syria, laying the legal groundwork to justify action, moving forces into place and rounding up allies in the region. Russia, which supports Syrian President Bashar al-Assad and has a veto on the United Nations Security Council, has blocked action against the regime accused of a chemical weapons attack against civilians on Aug. 21.

Indian companies led the increase in Asian bond risk this month, with State Bank of India rising 111.6 basis points to 371 and ICICI Bank Ltd. climbing 97.2 to 390.4, CMA data show. Swaps on China’s sovereign debt fell 14.5 basis points, the most among the 40 constituents.

Capital flight

India’s rupee has declined the most among 12 major Asian currencies in the past month, falling 9.2 percent against the dollar. The Indonesian rupiah was second-worst with a 7.2 percent drop, while the Philippine peso followed with a 2.8 percent weakening. Investors have been withdrawing funds from emerging markets as Fed policy makers debated whether the U.S. economy is strong enough to pare back monthly purchases of $85 billion in debt as early as next month.

Mitsui Chemicals was the best performer this month on the Japan index with a 67.1 basis-point drop, while Sony was fourth, falling 14.3, and Panasonic’s contracts dropped 6.1. Tokyo Electric Power’s bond risk climbed the most in the period, jumping 138 basis points.

Elsewhere in Japan’s credit markets, Mitsubishi Heavy Industries sold 45 billion yen of five- and 10-year debt yesterday, according to data compiled by Bloomberg. The manufacturer’s last debt sale was a 100 billion yen two-tranche offering in December 2009.

Bond returns

The country’s corporate bonds have returned 0.2 percent this month, compared with a 0.53 percent gain for the nation’s sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has lost 0.55 percent.

Japan’s benchmark 10-year yield fell half a basis point, or 0.005 percentage point, to 0.705 percent as of 11:06 a.m. That’s the lowest level since May 10.

Five-year credit-default swap contracts insuring Japan’s sovereign debt against default were little changed at 69 basis points yesterday, according to CMA. That’s down from this year’s high of 90.5 on June 20.

The yen has declined about 13 percent since Prime Minister Shinzo Abe took office on Dec. 26, pledging unlimited monetary stimulus to achieve a 2 percent inflation rate and spur economic growth. It traded at 98.16 yen per dollar as of 11:32 a.m. in Tokyo.

Nomura’s outlook

Nomura’s 60 basis point target for iTraxx Japan this fiscal year is 10 basis points higher than its earlier estimate, Toshihiro Uomoto, the chief credit strategist at the Tokyo-based brokerage, wrote in an Aug. 26 note to clients. Uomoto cited a slump in emerging economies, Fed tapering and geopolitical risks for the increase.

“The situation in Syria is threatening to become a long-term risk factor and something that cannot be ignored,” Uomoto said in a telephone interview yesterday. “Macroeconomic factors may push the index higher, but it should come back down as corporate fundamentals aren’t affected.”

Under the stimulus program started April 4, the BOJ has spent 35.9 trillion yen on buying Japanese government bonds from financial companies.


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