April 12 (IFR) - Japan's monetary easing has prompted a jump
in Japanese investor cash being earmarked for the US corporate
bond markets in the past week, fuelling hopes that it will turn
into a wall of funds in the coming months that will be enough to
stave off a market meltdown if rates rise.
The Bank of Japan announced on April 4 that it would spend
60 trillion yen (US$605bn) in each of the next two years buying
bonds and other assets. This move is now only about a week old,
but news of new mandates being signed by fund managers to invest
Japanese money in corporate bonds is circulating the market, and
debt syndicate managers are reporting an increase in the rate of
enquiries from the biggest Japanese banks and insurers about the
corporate bond pipeline.
The increased interest has the potential to turn into a
major inflow of investment dollars in coming weeks, given that
the BoJ's QE news has coincided with the annual asset allocation
process currently under way in the Japanese investment community
for the next fiscal year.
Bankers are heading to Tokyo to talk to the biggest
institutional accounts during the allocation process, and to
gauge their interest in expanding their usually narrow,
conservative investment parameters to include riskier assets.
"There is certainly the potential for the market to see
money flowing from Japan into the US corporate bond market,"
said Andrew Karp, head of investment-grade debt syndicate in the
Americas for Bank of America Merrill Lynch.
"We have already seen some of that, and I think you will see
an uptick in interest as a result of the recent moves by the
Bank of Japan."
Enquiry rates have also increased on the buyside.
"There has been anecdotal evidence that there are Japanese
investors looking to put money to work in the US corporate bond
market," said Michael Collins, a senior portfolio manager and
investment officer at Prudential.
An increase in Japanese investment in US assets is likely to
keep the bond bull market going longer than expected, whether
the inflows are directed to Treasuries, corporate bonds or both.
Any rise in Japanese flows is "definitely positive for credit
spreads", said Collins.
Nomura conservatively estimates that the US Treasury market
will receive US$80bn-$110bn of Japan inflows arising from the
With a surge in Japanese appetite, there is the hope the
Asian bid for US corporate bonds will become big enough to
compensate for any drop in total return investor appetite if
Treasury rates start to rise - potentially staving off the
market mayhem that a back-up in rates could cause.
"Mutual funds are getting between 35% and 40% of allocations
in new issues in high-yield and investment grade, and yet they
only account for 15% of all corporate bonds held in the market,"
said Jason Shoup, Citigroup's high-grade credit strategist.
"They are a huge source of demand, so even a tapering in
that demand, say because of rising rates, would be a concern."
Mutual funds hold about US$1trn of corporate bonds, leaving
Wall Street with the impossible prospect of clearing a US$100bn
glut of bonds for sale if mutual funds reallocate just 10% of
their bond holdings to stocks.
"The question is, who fills the void?" said Shoup. "The hope
is that the Asian investor base can fill that void."
The BoJ's QE effort "lends credibility to that idea", said
To have a meaningful ability to plug the gap, Japanese
investor appetite would need to expand to include Triple B
credits and longer-dated maturities.
While Japanese investors aren't known for turning on a dime,
bankers have been encouraged by the change in investment
behaviour by buyers from other Asian countries such as
Singapore, Hong Kong and Taiwan.
"In the last two years we have seen other investors in the
region go from only buying Single A names to buying Triple B
credits, sometimes out to 30 years in maturity," said Paul
Spivack, global head of fixed income syndicate at Morgan
Bankers in Europe, meanwhile, are hopeful that some of the
money from Japan's QE programme will end up in their region.
Around 10% of the allocation of the EFSF's latest bond - its
largest to date - came from the country.
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