- Even hedged, Nissan USD debt yields 10 times more vs yen notes
- Japan Inc.’s dollar issuance has swollen to most on record
Japan’s yield-hungry individual investors are shopping for bonds on Wall Street as the nation’s companies sell record amounts of dollar-denominated debt.
SBI Holdings Inc. starts offering a fund featuring Japanese corporate U.S. currency debt on Tuesday, competing with similar plans from Mitsubishi UFJ Financial Group Inc. and Daiwa Securities Group Inc. The SBI-Pimco Japan Better Income Fund includes Nissan Motor Co. notes that yield about 1.2 percent when fully currency hedged, 10 times that on its comparable yen notes, according to an investor handout.
“With sovereign bond yields turning negative, investors are forced to take credit risks,” said Masataka Horii, representative director of SBI Bond Investment Management, a joint venture between SBI and Pacific Investment Management Co. in Tokyo. “As long as Japanese companies continue to expand abroad they will need dollar-based funds.”
The world’s fastest-aging population has watched its investment options shrink after the central bank announced a negative-rate policy in January. Banks pay 0.001 percent on retail deposits, yields have sunk below zero on government bonds up to a decade in maturity and stocks are having their worst start to a year since 1995. Japanese companies’ dollar issuance has ballooned in 2016 as companies expand in faster-growing economies and basis swaps allow top-rated firms to get paid to borrow.
Japanese Inc. has sold $52.6 billion of dollar-denominated debt so far this year, already a record for the half-year period, and are on pace to exceed 2015’s full-year high of $79.4 billion, according to data compiled by Bloomberg.
The SBI-Pimco fund includes only fully currency-hedged dollar debt from Japanese companies with credit ratings of A or better -- or where a bond isn’t available, credit-default swaps, according to Horii. Other than Nissan, it holds Sony Corp. and Nomura Holdings Inc. in its model portfolio of 20 names, 13 of which are financial institutions.
A wave of recent scandals involving Japanese companies highlight the potential risk of such investments. Horii, the manager of the fund, said he wouldn’t have foreseen the accounting transgressions that have gripped Toshiba Corp. The company’s yen bonds due in December 2019 fell to a low of about 82 percent of face value in February, Bloomberg data show.
Hedging costs are another threat to returns, already cutting yields in the model portfolio by nearly 0.9 percent, according to the handout. The fund uses one-month yen forwards, which rose to the most expensive since mid-December at the start of this month amid the prospect of higher U.S. interest rates.
Horii doesn’t anticipate those costs will climb appreciably from current levels. He expects the Federal Reserve to only tighten policy once this year, while the Bank of Japan avoids deepening its minus 0.1 percent deposit rate.
A comparable fund from Daiwa Asset Management Co. has provided a total return of about 8 percent since its inception in March 2014, according to Bloomberg data.
Japan’s Finance Ministry has canceled a series of retail JGB offerings since the end of January, citing low yields. That on the benchmark 10-year note was at minus 0.12 percent on Tuesday in Tokyo.
Japanese households’ financial assets held in cash and deposits amounted to 902 trillion yen at the end of last year, more than half the total, according to BOJ data. Money in investment trusts made up 5.5 percent.
“The shift from deposit to investment has been gradual,” Pimco Japan Chairman Akinori Matsui and President Shinichi Yamamoto said in an e-mail. “However, we strongly believe an anticipated increase in this structural shift will be an important driver for sustainable growth.”