Sales of Aussie-Linked Structured Notes Gain Speed as Yen Slumps

Sales of structured notes linked to the Australian dollar accelerated in number in the second half of 2012 at the fastest pace in more than a year, as the currency surged against the yen.

Issuance rose 21 percent to 76 securities in the six months through December from the first half, the sharpest rise since the first six months of 2011, according to data compiled by Bloomberg. Yen-denominated notes accounted for the largest group at 37 percent of total sales, the data show.

The Australia dollar ended 2012 at the highest level against the yen since September 2008, after Japanese Prime Minister Shinzo Abe called for a higher inflation target. The so-called Aussie is set to gain on improvement in the Australian economy, while Abe’s policies are expected to weaken the yen further, Banco Bilbao Vizcaya Argentaria SA strategists wrote in a Dec. 21 report.

The rise in the Aussie-yen “has been extremely swift,” David Naville, head of foreign-exchange structuring for the Asia-Pacific region at Barclays Plc in Hong Kong, said in an interview. “It’s a great opportunity for investors.”

International Finance Corp., the private-sector investment arm of the World Bank, sold 14.85 billion yen ($166.9 million) of callable notes in December betting against the Japanese currency gaining on its Australian peer, Ben Powell, Washington D.C.-based senior financial officer at the company, wrote in response to e-mailed questions. IFC also sold $12.56 million of securities tied to the Aussie-U.S. dollar pair last month.

‘Just a Start’

IFC’s 1.5-year 8.95 billion yen note pays 2.5 percent annually and the two-year 5.9 billion yen security has a 2 percent coupon, Powell said. If the Australian dollar depreciates by more than about 10 percent, investors are paid in the Aussie at predetermined rates, potentially taking losses on their principal.

Nomura International Plc sold the notes in the uridashi market, Powell said.

In 2012, Aussie-linked securities accounted for almost 90 percent of the total value of dual-currency structured notes traded in the uridashi market, according to Bloomberg data. The market includes debt issued outside of Japan that’s sold mainly to the country’s individual investors.

Investments in the Aussie have been popular among the Japanese looking for high yields as the South Pacific nation has the highest interest rates among developed economies. The currency pair is also often used in so-called carry trades that borrow in the yen to buy the higher-yielding Aussie to take advantage of Japan’s lower borrowing costs.

The yen fell past 87 per U.S. dollar for the first time in 2 1/2 years on Jan. 2 after Abe reiterated his intention to weaken the nation’s currency. On the same day, the Australian dollar advanced to its strongest level in more than a week.

The Japanese currency probably won’t recover soon, Barclays’ Naville said.

“It may be just a start,” he said. “I’m quite confident the trend could last at least for 18 months.”

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