Yen bond issuance confronts an appealing window

Issuance conditions in the yen bond market for dollar-based entities are becoming conducive now that the US dollar/yen basis has contracted from deep negative territory

Viewpoint

Issuance conditions in the yen bond market for dollar-based entities are becoming conducive now that the US dollar/yen basis has contracted from deep negative territory, a prevailing situation for the last few years which had prompted anguish among yen syndicate managers as they confronted a severe issuance drought.

The basis contraction has been caused by a reduction in dollar funding from Japanese borrowers on the back of the increase in dollar Libor and the widening of secondary US dollar bond spreads. 

The basis at five years has contracted from deep negative territory of minus 90bp at the beginning of last year to stand at around negative 49bp whilst the 10-year basis has moved by a similar magnitude, from negative 88bp to negative 50bp.

Yen bond syndicate heads are hoping that this move will tease out issuance from entities which reference dollar-based funding, on the view that volatility in the US rates market - underpinned by rising risk aversion in equities on the back of what appears to be an emerging trade war between the US and China - and rising secondary dollar market spreads, will initiate a sweet spot for term funding in yen. 

It’s probably about time.

Apart from its attractiveness as a diversification play, whether in euroyen, Samurai or Pro-bond format, the relative stability of the yen market as a traditional safe haven amidst rising US market volatility plus a benign yen rates environment is beginning to place the yen bond market on the radar screens of treasurers and international asset managers.

At the same time, the traditionally conservative Japanese investor base is increasingly willing to embrace the lower reaches of the credit curve, with Mexico (A3/BBB+ Moody’s/S&P) expected to price in April, after initial approaches by its funding team to Japanese investors over the past few weeks. 

Meanwhile Ghana (B3/B- Moody’s/S&P) is also rumoured to be contemplating issuance, with government clearance given in March for issuance of up to US$2.5bn-equivalent, of which US$1bn will be new money and the remainder for refinancing.

I wouldn’t be surprised to see US investment banks and traditional US corporate issuers return to the Samurai market as the basis contraction continues.

A further tailwind for what seems to be shaping up as the start of a revival for the yen bond market is a bullish outlook for the yen. According to Morgan Stanley, the yen is fundamentally undervalued after around six years of declines thanks to the Bank of Japan’s ultra aggressive monetary easing.

A further boost to the yen could come from the full-scale unwind of carry trades, as a risk-off mindset towards emerging markets develops and hastens the repatriation of EM currencies back to the yen market. Stanley’s analysts at the end of last year reckoned dollar/yen would progressively weaken down to 108 in the third quarter of the year, but that level has been reached with dizzying speed - the touch as this column was going to press was 107.39 - and it seems that the US bank’s forecast of 104 for the final quarter may also emerge sooner than expected.

As we have seen in recent years in the Dim Sum bond market, what looks like a one-day currency bet tends to produce a storm of issuance. That time look to be beckoning in yen bonds. 

 

Jonathan Rogers is Contributing Editor for the The Asset