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 BoJ’s QE.
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 another strategist.
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 Stanley.
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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