Japan Credit Market Update: Spreads tighten in technical correction

Spreads on Japanese credit default swaps were tighter this week, in what traders described as a technical correction after a raft of convertible bond issue hedges in the past couple of months had earlier forced spreads wider.

The Moody’s Investors Service credit rating downgrade of Japanese Government bonds had a very limited impact on Japanese credit default swaps, dealers noted, as most investors are Japanese and “don’t care” about the downgrade, claimed a trader at a US house.

Dealers said trading this week was subdued by attention on the Fifa World Cup competition – co-hosted by Japan – adding that the limited activity was still largely driven by new convertible bond issues. The tightening trend on Japanese credit default swap spreads is likely to continue for several months, but the magnitude is not expected to be significant, noted one European dealer.

Spreads are settling in after widening in recent weeks, in post-convertible bond issuance mode, stabilising around the levels where the swaps traded before the new issues, said a dealer at another US house.

The cost of five-year debt protection on IT company Fujitsu, for instance, is now around 90 basis points, compared with 70bp before the company announced its planned convertible bond issue and a peak of 120bp after the company issued ¥220 billion of seven-year convertibles on May 7.

Elsewhere, banking and consumer finance names received a little boost on Friday from signs of recovery seen in the latest gross domestic product figures. Japan’s GDP showed the country’s economy grew 1.4% in the first quarter of the year from the previous quarter, and consumer spending grew 1.6% over the same period.

The spread on Bank of Tokyo-Mitsubishi five-year protection, which was actively traded this week, tightened to 60bp from about 65bp last week. In the consumer finance sector, the cost of five-year protection on leasing company Orix was quoted at 131bp-140bp on Friday compared with 133bp last week.

Consumer finance company Takefuji’s five-year credit default swap spread tightened to 115bp from 125bp earlier this week, but the spread could remain under pressure if talk of a convertible bond issue is confirmed. The company said on Thursday it would buy back up to 8.8% of its shares, worth as much as ¥150 billion, which could pave the way for a convertible bond.