(Corrects basis swap RIC)
* Yen carry trade pushes cross currency swaps higher
* Move lowers dollar bond costs for Japanese issuers
* Japanese firms expected to issue more overseas debt
By Atanas Dinov
Feb 19 (IFR) - The ultra-low coupons on Japanese corporate
bonds have long been the envy of global borrowers, but there are
signs that Japan's domestic debt market may no longer be the
cheapest game in town.
A pair of Japanese companies underlined the growing appeal
of overseas fundraisings on Tuesday as they announced US dollar
bonds. Nippon Telegraph and Telephone Corp is marketing a
seven-year offering, while Bank of Tokyo Mitsubishi UFJ is
working on a multi-tranche benchmark. Mitsubishi UFJ Lease &
Finance is also preparing to launch its first dollar benchmark.
Japanese issuers have been a rare in the dollar market, and
the growing interest in overseas fundraisings shows that the
weakening yen is forcing companies to rethink their approach to
"Domestic funding is no longer cheaper compared to the US
dollar market," said one Tokyo-based debt syndicate manager.
American Honda Finance hinted at this changing dynamic last
week, when it launched a US$750m five-year bond at a lower cost
than its Japanese equivalent - Honda Finance - would have paid
to issue in its home market. American Honda Finance and Honda
Finance are wholly-owned subsidiaries of Japanese carmaker Honda
The yen's 17%-plus drop against the dollar since December
has moved the cross-currency basis swap, a derivative that
allows a company to convert an interest rate in one currency
into another. Coupled with the extraordinarily low cost of
credit in the US dollar market, bankers believe the swing in the
swap market will lure more Japanese companies overseas in search
of cheaper funding.
"It's all a matter of the basis swap. Pre-Lehman (collapse),
the five-year basis used to be close to zero, then at one point
last year was almost at minus 100bp," said the syndicate
official. Bank of America Merrill Lynch quoted the swap at minus
57.875bp/51.875bp on Monday, according to Thomson Reuters Eikon.
EVEN MORE ATTRACTIVE
Japanese multinationals borrow in several currencies, and
tend to look at their cost in each market relative to yen,
making the basis swap a key part of that calculation.
In Honda's case, the US dollar bond priced with a coupon of
1.60%, at a cash price of 99.943 for a yield of 1.601%. That
translated into a spread of 75bp over US Treasuries, equivalent
to around 60bp over swaps, based on the five-year US dollar swap
spread quoted at 15bp on Tuesday, according to Tradeweb prices.
The swap spread is the differential between a fixed-rate and
floating-rate liability in US dollars.
That level, for Honda, looks even more attractive once the
coupon is swapped to yen.
Assuming a US dollar/yen cross-currency basis swap of about
minus 55bp, bankers estimated that American Honda's deal would
have swapped to about 10bp over Japanese government bonds.
Meanwhile, the syndicate manager estimates that a new
yen-denominated five-year bond by the Japan's Honda Finance
would be priced somewhere between 13bp and 15bp over JGBs.
The growth of dollar fundraisings is one consequence of the
return of the yen carry trade, where Japan's monetary easing has
forced domestic investors to look beyond the country's weakening
"With the carry trade returning the gap in the basis is
shrinking," said Yusuke Ikawa, rates strategist at RBS in Tokyo.
"We are seeing the return of some non-Japan based investors
involved in the dollar/yen FX carry trade. And the basis itself
is a carry trade."
The yen/dollar basis swap has rebounded sharply since early
December, and two weeks ago touched its least negative since
mid-2011, reflecting the growing two-way interest in the
Now, not only has the carry trade resumed, but foreign
investors have also rediscovered their interest in Japanese
assets, as evidenced by the 21% gain in the Nikkei index since
early December. The move to swap dollars into yen for investment
has also helped lift the basis.
With investors keener for Japanese assets and the cost of
funding in dollars lower, more global debt is likely to come
"Sentiment has significantly improved for this kind of
financing. EU tail risk being lower is partly behind this.
People now have more confidence to try to take advantage of the
arbitrage opportunity," added RBS's Ikawa.
(Reporting By Atanas Dinov; Editing by Steve Garton)