Corporate Bonds Break Worst Losing Streak on Recovery Signs: Japan Credit

Japanese investment-grade corporate bonds gained in July for the first time this year, breaking their longest losing streak on bets the world’s third-largest economy has begun to rebound after the March earthquake.

Company debt returned 0.3 percent, trimming this year’s losses to 1.2 percent, compared with gains of 5 percent for corporate bonds globally and 6.8 percent in the U.S., Bank of America Merrill Lynch indexes show. Notes sold by utilities rallied, while the debt of Tokyo Electric Power Co., the company at the center of the nation’s nuclear crisis, was removed from Merrill Lynch’s Japan Corporate Index after being cut to junk.

Growth will probably accelerate in the second half of 2011 after three quarters of contraction, according to a survey of 41 economists by the government-affiliated Economic Planning Association. Exports rose 5.4 percent in June from May on a seasonally adjusted basis as manufacturers such as Toyota Motor Corp. (7203) restored production damaged by the March 11 temblor.

The economy is “recovering as supply chain disruptions caused by the quake have been solved faster than expected,” Toshiyasu Ohashi, the chief credit analyst at Daiwa Securities Capital Markets Co., said in a telephone interview from Tokyo. Strong corporate balance sheets are also helping the bond market perform relatively well, he said.

Cash and near-cash items rose 31 percent to 113.33 trillion yen ($1.4 trillion) from a year ago for Japan’s biggest companies listed on the main board of the Tokyo Stock Exchange, according to the latest filings compiled by Bloomberg.

Bond Risk

The cost of protecting Japanese corporate bonds from default fell in July for the first time in three months, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Japan index of credit-default swaps declined 9 basis points in the month and was at 118 basis points as of 9:28 a.m. in Tokyo, according to CMA and Citigroup Inc. prices. The risk gauge dropped below the broader Markit iTraxx Asia index on July 18 for the first time since March 22.

July’s gains for corporate bonds followed a record six straight months of losses, Merrill Lynch data show. The debt of Kyushu Electric Power Co., Kansai Electric Power Co. and other utilities gained an average 0.41 percent as lawmakers approved a bill to help compensate those affected by the worst nuclear crisis since Chernobyl.

Bank debt gained 0.22 percent, technology companies returned 0.24 percent and bonds sold by automakers rose 0.23 percent, the index shows. The Topix index, which tracks 1,668 shares listed on the main board of the TSE, lost 0.92 percent.

Toyota Profit

Toyota, the world’s biggest automaker, may return to full production of all models in October, two weeks earlier than planned, Executive Vice President Atsushi Niimi said on July 4. The company raised its full-year profit forecast by 39 percent on Aug. 2, a day after Honda Motor Co. increased its profit forecast 18 percent.

The extra yield investors demand to own Toyota’s 60 billion yen of 1.073 percent bonds due June 2014 instead of government debt has narrowed to 14 basis points from a post-temblor high of 18 basis points, according to Japan Securities Dealers Association prices.

“The corporate bond market was paralyzed just after the quake but investor demand remained strong,” Yasunobu Katsuki, the chief credit analyst at Mizuho Securities Co. said in a telephone interview. A lack of corporate debt sales is causing bond spreads to tighten as demand exceeds supply, Katsuki said.

Sales of domestic corporate bonds in the three months through June 30 declined 35 percent from the same period a year ago to 1.824 trillion yen, the least for the quarter since 2006, Bloomberg data show.

Economic Forecast

Japan’s gross domestic product will probably shrink at a 3 percent annualized pace in the three months through June, the third straight quarter of contraction, before growing 4.3 percent in the third quarter and 5 percent in the fourth, according to the Economic Planning Association’s survey.

Manufacturers see a 21 percent increase in profit in the six months ending March 2012, the Bank of Japan’s quarterly Tankan survey indicated on July 1.

Japan’s export-led recovery is clouded by a strengthening yen and the outlook for global growth.

Manufacturing indexes in China, the U.S. and Europe fell in July as the global recovery lost momentum and debt crises in Europe and the U.S. disrupted financial markets. Japan’s industrial production rose less than expected in June as companies warned that a yen close to a post-World War II high threatens to drag down exports.

Strengthening Yen

The yen appreciated 4.95 percent against the dollar in July and traded at 79.34 per dollar as of 2:31 p.m. in Tokyo after Japan intervened in the currency market for the first time since March. Japanese Finance Minister Yoshihiko Noda said today’s intervention was unilateral.

Japan’s benchmark 10-year yield declined 0.5 basis point to 1.01 percent as of 2:22 p.m. in Tokyo, according to prices provided by Japan Bond Trading Co., the nation’s largest interdealer debt broker. Contracts to insure Japanese government debt against default for five years were little changed at 90 basis points Aug. 2, CMA prices in New York show.

The Bank of Japan eased monetary policy today by expanding its asset-purchase fund to 15 trillion yen from 10 trillion yen, as well as increasing a credit facility by 5 trillion yen to 35 trillion yen. The central bank also kept its benchmark interest rate near zero.

Japan’s parliament approved a bill yesterday to create a state-backed entity to help Tokyo Electric pay damages to those affected by the disaster from its Fukushima Dai-Ichi plant. About 160,000 people were evacuated and radiation contaminated Japanese beef and other products after the earthquake and tsunami led to reactor meltdowns at the site.

Tepco Downgrade

The extra yield investors demand to own Tepco’s 1.97 percent bonds due in June 2016 instead of similar-maturity government debt narrowed 52 basis points to 433 basis points last month and was at 416 on Aug. 3, according to JSDA prices.

The company’s debt fell 3.75 percent in June, the worst return in the Japan Corporate Index, and wasn’t included in the benchmark in July after its long-term credit rating was cut four steps to B1, the fourth-highest non-investment grade, by Moody’s Investors Service.

Bonds sold by Osaka-based Kansai Electric, Japan’s second- largest operator of nuclear reactors, returned 0.33 percent in July after dropping 0.39 percent the previous month. Fukuoka- based Kyushu Electric’s debt gained 0.46 percent, after losing 0.45 percent in June.

Nuclear plant operators have offered no notes since the temblor, compared with 555 billion yen sold in the same period a year ago, Bloomberg data show. Kansai Electric and Kyushu Electric pulled sales in June.

“We need to wait a bit more for sales of power company bonds,” said Tomone Kawachi, chief investment officer at WERU Asset Management Co., a Tokyo-based investment advisory firm. “We can’t forecast the outcome of the nuclear power industry and that may have a huge impact on their business.”

To contact the reporter on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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