Japan Credit Market Update: Spreads track US and Europe wider

Japanese credit default swap spreads were wider this week, tracking the trends in the US and Europe in a generally bear market, traders said.

“Generally, we’re seeing a widening of spreads, in line with the US and Europe,” said one trader.

“There’s been more customer flow with volatile offshore equity markets prompting more people to buy protection,” noted another trader. As a result, “bids are up across the board.”

The Nikkei stock index was down about 2% in earlier trade Friday, tracking US stock markets lower. Overnight, the Dow Jones Industrial Average was 1.6% lower and the Nasdaq dropped by 2.9%.

The trader added that activity on the Japanese credit default swap market has generally picked up in the past two weeks, after several weeks during which the World Cup took centre stage on trading floors.

The number of trades were back up to about 20 a day, compared to five or six trades a day two weeks ago.

Most of the interest remained on trading companies and consumer finance institutions and especially on the names that moved last week, including leasing company Orix and real estate company Mitsui Fudosan.

The spread on Orix's credit default swap was slighly tighter after last week’s sharp move, stabilising around 240bp. The spread jumped to 270bp from 205bp earlier last week due to concerns over the company’s accounting pratices.

The cost of five-year protection on Mitsui Fudosan continued to rise after the company priced a ¥80 billion eight-year convertible bond last week. Investors continued to hedge their fixed-income positions on the convertible, pushing the spread to 170bp this week from 155bp last Friday.