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Goldman Sells Most Yen Steepeners Since ’06 as Spread Rise Seen

Goldman Sachs Group Inc. sold the largest so-called steepener notes denominated in yen in eight years as investors bet the spread between short- and long-term interest rates in Japan will widen.

Signum Finance Cayman Ltd., a special purpose vehicle of the New York-based investment bank, issued 6 billion yen ($59 million) of the notes earlier this month in two separate offerings, according to data compiled by Bloomberg. The last time more steepener securities were sold was in September 2006 when a funding company Japan Finance Organization for Municipalities raised 20 billion yen.

Steepener notes allow investors to benefit from escalating yield differences that occur as a result of increases in the yield curve between two securities of different maturities. The strategy can be effective in certain macroeconomic scenarios in which the price of the longer term note is driven down.

The spread between two-year and 10-year government bonds in Japan is expected to widen to 80 basis points by the end of 2015 compared with 56 basis points at the end of this quarter, according to average estimates from economists surveyed by Bloomberg News.

The yield differential is forecast to augment as the Bank of Japan keeps short-term rates close to zero while long-term interest rates move in tandem with rising borrowing costs in the U.S., according to Singapore-based Marcel Thieliant, a Japan economist at Capital Economics Ltd.

Global Sales

“Higher U.S. yields raise the opportunity cost of owning Japanese government bonds,” Thieliant said in a July 21 e-mail. “So yields will have to rise to compensate investors for the higher returns possible elsewhere.”

Miyako Takebe, a Tokyo-based spokeswoman for Goldman Sachs, declined to comment in an e-mail on July 22.

Global sales of steepeners denominated in dollars have increased this year as investors shrug off concern the yield curve in the U.S. will keep flattening. Issuance climbed to $1.74 billion as of July 23, versus $1.32 billion a year earlier, Bloomberg data show. The number of offerings rose to about 190, almost twice as many as the period prior.


The amount of yen-denominated steepeners as a proportion of such notes denominated in any Asia-Pacific currency climbed to 11 percent this year compared with just 1.5 percent the same period last year, Bloomberg-compiled data show. Most -- 88 percent -- were denominated in South Korea won and the rest in Australian dollars.

Abenomics Bet

The only two yen steepener issues this year were from Goldman Sachs’ special purpose vehicle, the data show. Both 3 billion yen parcels of 20-year notes pay a certain percentage higher than the difference between the two-year and 20-year Japanese yen interest rate swap.

The steepeners issued July 11 pay 0.4 percent more than the spread, capped at 2.8 percent, while the others, sold July 3, pay 0.38 percent, capped at 3 percent, the data show.

The notes will return an average of about 1 percent annually through 2034, based on implied forwards of the Japanese yen swap curve, Bloomberg data show. That compares with a 1.4 percent annual yield on Japanese government 20-year bonds.

The notes will appeal to investors wanting to bet Abenomics will succeed in Japan, according to Shane Oliver, the head of investment strategy at AMP Capital Investors Ltd. in Sydney.

“Abenomics seems to have been successful so far,” Oliver said in an e-mail on July 21, referring to Prime Minister Shinzo Abe’s program of monetary stimulus, fiscal spending and deregulation to defeat deflation and spur growth. “As confidence in it continues to build, longer-term yields will eventually start to rise ahead of any increase in short-term interest rates.”

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

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

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