Junk Euphoria Crosses Pacific as Sharp Worry FadesYusuke Miyazawa
Japan’s junk bonds are joining the global rally as optimism over Prime Minister Shinzo Abe’s economic stimulus boosts investor appetite for riskier debt.
Sharp Corp.’s 0.846 percent bonds due 2014 soared to 77 yen per 100 yen face value on Jan. 28, from 46 yen two months ago, according to JS Price data. The notes of junk-rated Tokyo Electric Power Co., Nippon Sheet Glass Co. and Kawasaki Kisen Kaisha Ltd. also climbed. Global non-investment grade debt has gained to a record 105 cents on the dollar, Bank of America Merrill Lynch index data dating back to 1997 show.
Investors are seeking higher returns, emboldened by Abe’s plans for 10.3 trillion yen ($113 billion) of fiscal stimulus and global monetary easing that has contributed to record inflows into funds that own speculative-grade debt. Sharp’s bonds maturing in 2014 yield 19.5 percent while the television maker warns there is “material doubt” about its ability to survive. Tepco, which may have an active fault under one of its atomic plants, has a yield of 3.3 percent on its 2017 debt.
“The market has become bullish to the point of euphoria,” Taketoshi Tsuchiya, Tokyo-based director of credit trading at Barclays Plc, said in a telephone interview on Jan. 28. “Sharp’s bonds are overheating.”
Sharp’s 0.846 percent bonds rose to 81 yen on Jan. 17, the highest level since Aug. 2. Tokyo Electric’s notes maturing in 2017 advanced 6.5 yen in the past two months to 94, and Nippon Sheet Glass’s 24 billion yen of debt due 2015 climbed 11.2 yen to 88 yen, JS Price data show.
Japan’s corporate bonds pay an average 0.63 percent yield, while its sovereign notes offer 0.6 percent, according to Bank of America Merrill Lynch index data. That compares with 6.36 percent for global high-yield securities.
Rating & Investment Information Inc. of Japan has a BB-ranking on Sharp’s notes, three levels below investment grade, and rates Nippon Sheet Glass bonds at BB, the second-highest junk level, according to data compiled by Bloomberg. Standard & Poor’s ranks Tokyo Electric’s debt at BB+, the highest non-investment score.
Kawasaki Kisen, Japan’s third-largest maritime shipper, was downgraded by one level yesterday to BB- by S&P, its third-highest junk grade. The company’s 1.46 percent bond maturing June 2014 climbed to a record 97.9 yen on Jan. 28, JS Price data show.
Elsewhere in Japan’s credit markets, Japan Student Services Organization sold 40 billion yen of 0.15 percent two-year bonds, SMBC Nikko Securities Inc. said in a statement yesterday.
Japan’s corporate bonds have returned 0.23 percent this year, compared with a 0.27 percent gain for sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide fell 0.63 percent.
Yields on Japan’s benchmark 10-year government bonds rose half a basis point, or 0.005 percentage point, to 0.77 percent as of 11:33 a.m. in Tokyo. The securities yielded 123 basis points less than similar-maturity U.S. Treasuries, compared with 89 a year earlier, data compiled by Bloomberg show.
The yen weakened 0.2 percent to 91 per dollar as of 11:46 a.m. in Tokyo. The Japanese currency lost 5.2 percent this year, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
Five-year credit-default swaps that insure Japan’s sovereign debt fell 6.7 basis points this year to 75 basis points yesterday, after reaching the highest since Aug. 1 on Jan. 17, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the contracts signals improving perceptions of creditworthiness.
The Markit iTraxx Japan index decreased 42 basis points over the last two months to 135 basis points Jan. 25, the lowest since August 2011, according to CMA prices. The risk benchmark for insuring the nation’s corporate bonds may decline further to about 80 basis points by March 31, 2014, according to Nomura Holdings Inc.
“The Abe administration’s economic policies are set to combine with the recovery in the U.S. economy,” Toshihiro Uomoto, chief credit strategist at the brokerage in Tokyo, wrote in a note dated Jan. 22. “With the synergy effect of both, we expect some tightening in Japanese credit spreads.”
The weakening of the yen was spurred by Abe, Japan’s seventh prime minister since 2007, who urged the central bank to double its inflation target to 2 percent to help revive the world’s third-biggest economy. The Topix stock index has climbed for 11 straight weeks, the longest rally in 40 years.
The Abe Cabinet in Tokyo yesterday approved a proposed spending total of 92.6 trillion yen for the fiscal year starting April 1. The budget cut spending for the first time in seven years, underscoring Abe’s efforts to establish fiscal-discipline credentials even as he seeks to boost growth. Lawmakers will debate the spending plan in a session of Parliament that opened this week.
Deposits into funds that own speculative-grade debt, rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P, climbed to a record $72.4 billion last year, according to data from EPFR Global.
“Japan’s credit markets were lagging behind, weighed down by the strong yen,” Tomone Kawachi, executive partner in Tokyo at WERU Asset Management Co., said in a telephone interview yesterday. “Now that it has been removed, they are catching up.”