Prudential sees signs of Corporate Bond Pullback
By Bloomberg
While the tumble in U.S. corporate bonds captured global investors' attention last week, Japanese notes are also starting to fall. It's just a lot harder to see.
Japanese company debt indexes from Bank of America Merrill Lynch and Nomura Holdings Inc. show virtually no change since the start of the month. The pullback in the market is visible in longer-maturity bonds of companies such as Sumitomo Realty & Development Co. and lower-rated debt from the likes of Sharp Corp. and Tokyo Electric Power Co.
Concern that the global economy is slowing is making Japanese investors demand more compensation for risk, as industrial output unexpectedly dropped at home. The change in sentiment is harder to see in Japan's bond market because unprecedented central bank debt purchases have crushed yield premiums, with the average spread for domestic corporate notes down by more than half since Prime Minister Shinzo Abe returned to power at the end of 2012.
"The corporate bond market got a little heated recently, and things have calmed down a bit," said Kenji Sakaguchi, the chief investment officer in Tokyo at Prudential Investment Management Japan Co., which managed the equivalent of about $141 billion at the end of June. "The indicative yields on some bonds have widened, and in that sense we are seeing a slight change from the constant tightening."
Nomura Index
The average corporate bond spread was at 24 basis points yesterday, one basis point higher than a month earlier, according to data from Nomura, Japan's biggest brokerage. Premiums rose for six of 31 industries and declined for one in the Nomura index as of Oct. 16, it said in a report this week. There were no increases a month earlier and 10 segments fell.
"There is a kind of change in the market momentum," said Toshihiro Uomoto, the chief credit strategist at Nomura in Tokyo. More investors now probably expect a "turning point" in sentiment to come earlier than they projected, he said.
Concerns are also mounting as Japan is scheduled to raise its sales tax for a second time next October, around when U.S. futures rates suggest the Federal Reserve may increase interest rates. Abe has yet to make a final decision on boosting the tax to 10 percent after an initial increase to 8 percent in April caused the economy to shrink 7.1 percent in the second quarter.
Longer Bonds
The average yield premium on Japanese corporate bonds fell to a seven-year low of 20 basis points on Aug. 31 and has remained around that level since, Bank of America Merrill Lynch data show. The spread on U.S. corporate bonds widened 15 basis points to 127 yesterday from the end of August, the data show, after a rout in risk assets last week. A basis point is 0.01 percentage point.
The extra yield on Sumitomo Realty's 10-year bond has widened nine basis points since it was sold on Sept. 3. Japan's third-largest developer and the most highly leveraged of the big three has issued 120 billion yen of 10-year notes this year in six sales. The real estate company sold debt of that maturity in July of last year for the first time in at least two decades, according to Bloomberg-compiled data.
Other companies whose bond spreads have widened include ANA Holdings Inc.'s 12-year bonds, and longer-term debt sold by Sumitomo Corp. The trading company said last month that it will book 240 billion yen in losses from investments largely in shale oil assets in the U.S.
Interest rates in Japan have been tumbling as the BOJ carries out unprecedented stimulus to beat deflation, buying about 7 trillion yen of sovereign notes a month. The yield on the nation's benchmark 10-year bond touched 0.46 percent today, its lowest level since April 8 of last year.
Lower Ratings
Lower-rated bonds that have advanced this year have also given up some of those gains. The spread on Sharp's 1.604 percent debt due in 2019 has widened 13 basis points from a two- year low of 211 on Sept. 29. The electronics maker is rated by Standard & Poor's at B+, its fourth-highest non-investment grade. The spread on Tokyo Electric's 2.205 percent bond also widened after narrowing this month to the lowest since around the Fukushima nuclear disaster in March 2011.
It's too early to tell whether the change in sentiment will result in a complete shift in market direction, according to Prudential's Sakaguchi. The widening in spreads could be small if global financial markets don't correct further, he said.
"Concern about the global economy and other factors such as the Ebola outbreak have helped to generate globally a risk- off approach," said Sakaguchi. "Seeing that, Japanese investors and market participants too are taking a more cautious approach."