Samurai bond issuance soared to a two-year high this month, as issuers tapped Japanese investors keen to secure higher yields in the Bank of Japan’s new world of negative interest rates.
The bumper issuance comes after a famine in March and April, when market participants paused to assess the drastically different pricing environment in the wake of the BOJ’s unexpected policy announcement in late January.
Sales of samurai bonds – yen-denominated debt issued by non-Japanese entities – totalled 425.7 billion yen ($4.07 billion) in June, the most since May 2014.
That coincided with yields on most Japanese government bonds (JGBs) falling below zero, to touch record lows last week.
This has made samurai bonds more appealing to a broader range of Japanese investors, which in turn is drawing more issuers to meet their funding needs, bankers say.
“As Japanese investors are aggressively expanding their investments with the introduction of the BOJ’s negative interest rates, more issuers are considering samurais,” said Kenichi Kanda, head of international debt origination at Daiwa Securities in Tokyo. “I think 2016 will be a good year for the samurai market.”
Besides the European banks seeking to diversify their funding sources, the changed market conditions are luring emerging market countries back to the samurai market.
Mexico’s 135 billion yen issue on June 9 was 1.3 times oversubscribed, and it was able to issue at lower coupons compared with its last samurai two years ago.
Its 5-year, 10-year and 20-year tranches priced at 0.70 percent, 1.09 percent and 2.4 percent respectively, compared with 2014’s 0.80 percent, 1.44 percent and 2.57 percent coupons for those maturities.
Last week, Indonesia raised 100 billion yen from privately-placed samurai bonds, selling 62 billion yen of 3-year notes with a 0.83 percent coupon and 38 billion yen of 5-year notes with a 1.16 percent coupon.
Societe Generale issued 120 billion yen worth of samurai bonds in late May, and French bank BPCE issued 60.6 billion yen this month.
SWAPS RATES PUSH UP ISSUANCE COSTS
To be sure, record-low JGB yields alone will not necessarily lead to a flood of samurai issuance, as non-Japanese issuers are not always able to benefit from the country’s low interest rates.
Since most issuers have no requirement for yen funding, they need to swap the funds they raise into other currencies, which offset any benefits from the interest rate differential. Recently high swap rates, which gauge the cost of exchanging interest payments to yen, have pushed up issuance costs.
The five-year dollar-yen swap spread is now around 0.92 percent, compared with 0.39 percent in mid-July 2014.
“The swaps rates meant higher costs, and then came the BOJ’s minus interest rates. It was a ‘double punch’ for issuers,” said
SMBC Nikko’s Kinoshita, to explain the pause in issuance earlier this year.
But one upside of negative interest rates for issuers is that a diverse range of Japanese buyers are more willing to invest in longer maturities than they did before, taking on more duration risk in order to get higher returns.
“Samurai investors are seeking longer tenors for higher yields, and we also see new investors coming to the market,” said Takaomi Tahara, joint head of international debt syndicate at Nomura Securities in Tokyo.
Before the introduction of negative rates, more than 80 percent of samurai issuance was concentrated in 1- to 5-year maturities.
But in the aftermath, only about 20 percent of issuance will mature in under 6 years, said Shinichi Arie, head of the fixed income department at Amundi Japan Ltd.
“The 7- to 10-year maturity seems to be the new sweet spot depending on coupon levels,” said Hiroyuki Kinoshita, head of global fixed income capital markets at SMBC Nikko in Tokyo.
Credit Agricole issued a 130.1 billion yen samurai with five tranches, including 5-, 7- and 10 years.
“We were a buyer of the Credit Agricole bond because the spread was, well, not really attractive, but acceptable, given the negative yield environment,” said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments in Tokyo.