These Risky U.S. Loans Are Adored by Japanese Investors

When returns on safe assets are low, investors look for riskier places to put their money. In Japan, where yields have been near zero for some traders’ entire careers, an increasingly popular investment is bundled U.S. corporate loans known as CLOs, or collateralized loan obligations. Some observers have drawn parallels to the collateralized debt obligations, or CDOs, that helped turn packaged U.S. mortgages into bombs that laid waste to global financial markets in 2008. Japanese regulators have drafted a rule that could limit their risk -- along with a big exemption that will let the frenzy continue.

CLOs are securities made up of leveraged loans –- typically borrowings of companies with low credit standing. Investors buy the products in tranches of varying levels of risk. Japanese financial firms including Norinchukin Bank have been snapping up the highest-rated slices, which rank first for payments but get lower returns than the riskier portions.