Japanese investors are beginning to shake off their notorious aversion to risk and foreign companies and governments are taking advantage.

Author:
Project Coordinator:

The yen bond market is back after a prolonged drought with euroyen and private yen placements thriving and samurai bond issuance hitting its highest level since the 2008 global financial crisis.

The biggest indicator of renewed interest in yen paper came earlier in August when the Republic of the Philippines issued the biggest ever samurai deal — issuance in yen by a foreign entity onshore in Japan — via a $1.38 billion three-tranche offering, which marked the Philippines’ return to the yen bond market after an eight-year hiatus.

The stunning size of the Philippines’ deal highlights the growing willingness of Japan’s notoriously conservative domestic investor base to embrace emerging market credits on the BBB-rated part of the credit curve. Prior to this most recent issuance, the Philippines previously required the underwriting of a political risk guarantee from the Japan Bank for International Cooperation. The same had also been true of the Republic of Indonesia, which was able to bring in $896 million in May with a four-tranche deal on a standalone basis — minus political risk insurance.

Goldman Sachs CEO Lloyd Blankfein

These developments are being driven by a host of factors including a narrowing of the basis swap between yen and dollars (meaning issuance by dollar-based investors is cheaper on a hedged basis than it has been for the best part of four years) as well as the perception that the yen is set to strengthen against the dollar. At the same time, widening credit spreads have established a sweet spot for relative value and the yen market has been the beneficiary of the return of a “risk-on” mentality.

The onshore institutional investor base in Japan is also awash with liquidity which has been starved of assets in the midst of severe yield compression thanks to the Bank of Japan’s aggressive quantitative easing program.

Speculation that this program might be on the verge of being tapered has led to a modest rise in yen bond yields, with 10-year Japanese government bonds moving from deeply negative territory to positive.

A clear indication of the yen bond’s market attractiveness has come this month from perennially canny issuer, US investment bank Goldman Sachs, which on August 10 issued its first benchmark-sized public euroyen bond since 2012 in the form of a $361 million 5.25-year offering.

Goldman Sachs had been a frequent visitor to the yen bond market when the basis swap was benign but stayed away as the cost of swapping from yen back to dollars became prohibitive. Five-year yen/dollar swaps have moved to around the minus 40bp mark from minus 90bp where they stuck for the past few years, which helps explain the renewed interest in the yen bond market from issuers.

A contraction of a similar magnitude has been evidenced in the yen/euro swap as well.

The quest for yield from yen-based investors has allowed long-tenor issuance to open up. So just prior to Goldman Sachs’ deal, German chemicals producer BASF placed a $90 million 1.025% 30-year bond, marking its debut in the yen market. BASF presented relative value thanks to a widening of European credit spreads.

The iTraxx Europe five-year credit default swap index which measures European credit trends has widened from around 44 basis points in February to around 70bp in August, presenting a solid value proposition to investors. 

In a sign that the yen market is firing on all cylinders and willing to embrace tenor, Danish Bank Danske Bank has tapped at 20 years this month, via a senior, non-preferred yen private placement.

According to bankers in Tokyo, a single investor has helped generate the opening up of longer tenors in the yen bond market thanks to reverse enquiry, which teased out issuers.