Equity-Linked Uridashi Demand to Defy Stock Slump, Nomura Says

Demand for uridashi notes linked to equities and foreign-exchange rates will exceed that for securities which pay a fixed coupon this year as a “low-yield environment” prompts investors to seek better returns, according to Nomura Holdings Inc. (8604)

The Nikkei 225 (NKY) Stock Average has slumped 13 percent this year compared with an about 4 percent decline in the MSCI Asia Pacific excluding Japan Index. About 59 percent of the equity-linked notes are tied to the Nikkei 225’s moves.

“The Nikkei may have declined but for Japanese investors, something in the range of 14,000 to 15,000 is high after being below 10,000” for years, said Akihiro Igarashi, Nomura Securities Co.’s joint head of international debt syndicate. “As long as investors don’t see a one-way decline, we’ll see continued demand for equity-linked products.” Nomura has ranked as the No. 1 arranger of uridashi bonds since 2012.

Bank of Japan monetary stimulus designed to spur economic growth and achieve 2 percent inflation has weakened the yen by about 7 percent over the past 12 months, eroding the value of wages in Asia’s second-largest economy to a record low. A misery index, which gauges economic hardship, is forecast to climb to a 33-year high while Japan’s 10-year sovereign yield of 0.61 percent is the lowest globally.

Some $7.03 billion of uridashi bonds, which are issued outside Japan for sale mainly to Japanese individual investors, have been sold since Dec. 31, the slowest start to a year since 2009, according to data compiled by Bloomberg. Of those, 54 percent pay a fixed rate while the returns of 37 percent are linked to equities or share indexes.

Yield Hunt

Of the fixed-rate note sales last month, 35 percent were denominated in Brazilian real, 28 percent in Australian dollars, 14 percent in U.S. dollars and 11 percent in Turkish lira.

The real has appreciated 1.5 percent against the greenback this year while the Aussie has strengthened 1.6 percent. Traders are signaling Brazil’s central bank will end a yearlong tightening cycle after raising the benchmark Selic rate by a quarter-point to 11 percent next month.

Federal Reserve officials in the U.S. have said they’ll probably hold the central bank’s target interest rate near zero “well past the time” unemployment falls below 6.5 percent.

“If you look back several years ago, the major currencies for plain vanilla uridashi notes were U.S. or Australian dollars,” Igarashi said. “Now, investors are buying real or lira-denominated bonds for higher yields.”

To contact the reporter on this story: Regina Tan in Hong Kong at rtan87@bloomberg.net

To contact the editors responsible for this story: Richard Bedard at rbedard2@bloomberg.net; Katrina Nicholas at knicholas2@bloomberg.net

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