* Bond ladders spiced with foreign sovereigns prove a hit
* Regional banks take to simple structure of the funds
* Low JGB yields, slack lending drive foreign bond demand
By Shinichi Saoshiro
TOKYO, Aug 5 Japanese fund managers spiced up a
simple investment product known as bond ladders with high-grade
foreign sovereign debt and created an instant hit with domestic
banks and credit unions.
Confronted with low interest rates and sluggish lending at
home, these investors were eager to look beyond traditional
investments in low-yielding Japanese Government Bonds (JGBs).
The popularity of bond ladder funds highlights the struggle
of regional banks to earn income with domestic yields driven to
rock bottom levels by the Bank of Japan's easy monetary policy.
Bond ladder funds invest in debt with maturity dates that
are spaced out over a number of years. When bonds with the
shortest maturities mature, the funds are rolled over into the
longest maturities in the portfolio. Bond ladders are designed
to diversify risk arising from interest rate fluctuations.
The key behind the bond ladder funds' popularity is their
simplicity and all-in-one packaging welcomed by regional banks
and credit unions that often do not have the resources available
to their larger peers.
"Many regional banks ceased to become active foreign bond
investors after the Lehman crisis. And even if they wanted to
invest, some only have an extremely limited number of staff
available for the task as their internal resources have been
shrinking," said Koji Ezura, head of the institutional sales
department at Nikko Asset Management.
"So they became interested in funds that are very simple and
managed by others. There are no derivatives involved and
decision making is not required. This was a very big factor."
Nomura Securities, which led the way by launching bond
ladder funds in June 2012, has seen investment by regional
financial institutions top 500 billion yen ($4.87 billion) as of
end-June. It said about two-thirds are in foreign sovereign
bonds from the United States, Germany, France and Britain.
"Private placements attracting 500 billion yen in two years
- that is a pace we have never seen before," said Toshiyuki
Ochiai, deputy managing director at Nomura Securities' fixed
income marketing department.
Pressed to follow suit, Nikko Asset Management offers
Belgian government bonds in addition to Treasuries, Bunds, Gilts
and French government debt in their bond ladder funds. It has
drawn several dozen billion yen in investment from regional
institutions since launching foreign bond ladders last year.
SUPER LOOSE POLICY SPURS DEMAND
Asset managers estimate that bond ladders as a whole have
attracted roughly one trillion yen in investments.
Demand for foreign bond ladders increased rapidly after the
BOJ launched its super loose monetary policy in April 2013 to
combat deflation and kick start the economy, depressing domestic
bond yields and credit spreads.
The benchmark 10-year JGB yield has drifted down to a low
0.5 percent under this policy. A U.S. Treasury note of the same
maturity yields more than 2.5 percent.
Many Japanese regional banks have been struggling to find
new creditworthy borrowers in their own turf as many regions
bear the brunt of the country's declining population.
Indeed, Japan's financial watchdog has been putting pressure
on banks to consolidate due to concerns they may not be able to
survive as the population in some prefectures could drop up to
25 percent in the next two decades. In Tokyo, the population is
expected to fall only about five percent in the same period.
"Lending might have recovered a bit but the situation
remains very tough for banks, as seen by their low loan-deposit
ratios. They are thus looking at foreign bonds. It's easy to see
this as a theme dominated by the BOJ's monetary policy, but it
is also a macro story of a country with a dwindling population,"
said Ezura at Nikko Asset Management.
Loan-deposit ratios have fallen significantly over the years
as banks have kept attracting more deposits from savers while
"There are two factors behind demand for bond ladders, first
being expectations of ongoing ultra-low interests rates and
continued investment demand from the banks as they struggle to
find lending opportunities," said Katsuhiko Nagasaka, deputy
managing director, regional financial institutional and public
sector clients consulting department's retail division at Nomura
"Second, if the BOJ succeeds in achieving its 2 percent
inflation target, concerns over rising domestic yields will make
it easier for regional banks to shift away from their
traditional focus on JGBs and raise the weighting of foreign
bonds in their portfolios," he said.
As simply designed as bond ladder funds are, they are not
without potential risks.
Asset managers say profit taking by investors enticed by low
yields, already taking place with euro zone sovereign bond rates
such as those of Bunds recently hitting record troughs, could
disrupt the stability of the funds.
There could also be other reasons to sell the funds, such as
investors offloading their foreign bond holdings to offset any
losses suffered in the widely-held JGBs.
Still, demand for foreign debt as a whole looks likely to
"When we visited regional institutions a few months back,
they appeared full on bond ladders but were eager for a
different kind of product that is safer and offers yield," said
Shogo Yoneyama, head of the marketing planning department at
Daiwa Asset Management.
Ezura at Nikko Asset Management concurred.
"We get requests from regional investors who want
tailor-made products investing in bonds from developed economies
and Antipodean countries," he said.
($1 = 102.5900 Japanese yen)
(Additional reporting by Hideyuki Sano; Editing by Jacqueline