The Bank of Japan’s tightened grip on the yield curve is encouraging bullish forecasts for corporate bond demand, after issuance doubled this quarter.
Average company note yields have fallen three basis points to 0.32% since the BoJ’s strategic shift on September 21, according to a Bloomberg Barclays index.
The implied volatility of 10-year government bond futures, a benchmark for funding costs, sank 171 basis points last week, the most since April 2013, according to the S&P/JPX JGB VIX Index. Mizuho Securities Co, 2016’s top underwriter for yen corporate bonds, said reduced price swings will make investors more comfortable with the securities.
While borrowing costs jumped in the run-up to the policy meeting, they have come back down after the central bank decided to target a 10-year sovereign yield of about 0% and to control the curve by adjusting the maturity of notes it will buy. Japanese corporate issuance surged 101% this quarter from a year earlier to ¥4.8tn ($48bn), data compiled by Bloomberg show.
“The BoJ’s move will stabilise the yield curve,” said Katsuyuki Tokushima, the chief fixed-income analyst at NLI Research Institute, a unit of Japan’s largest life insurer Nippon Life Insurance Co. “The volatility of Japanese government bond yields will without a doubt fall, making it easier to buy corporate bonds as well.”
The central bank said on September 21 that its policy is aimed at preventing a big change in the yield curve from current levels.
“An excessive decline and flattening of the yield curve may have a negative impact on economic activity by leading to a deterioration in people’s sentiment,” it said in its review of policy. Such moves hurt banks’ profits and lower returns on insurance and pension products, the BoJ said.
More stable sovereign yields “will make it easier for investors to take on the interest-rate risk of holding long-term bonds,” said Tetsuji Matsuka, the head of the ALM planning treasury department at Tokyo Star Bank. “There’s a possibility that banks will increase investments in super-long bonds.”
While the BoJ’s new policy may stabilise interest rates in the short-term, if it’s continued too long it could hurt the market’s function, making the side effects bigger than the benefits, said Yasunobu Katsuki, a senior primary analyst at Mizuho Securities.
The yield curve control is like “nationalising the bond market,” he said.
An expected steepening of the yield curve will probably help Japanese lenders by improving their earnings outlook, analysts led by Toshihiro Uomoto, the chief credit analyst at Nomura Holdings, wrote in a report dated September 26.
The brokerage recommends investing in corporate bonds of Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group, according to the report.
While the BoJ is trying to generate more than 2% inflation with its stimulus measures, it’s far from that goal.
The consumer price index excluding fresh food dropped for a fifth straight month in July, according to government data.
“Credit spreads will continue to face pressure to tighten,” Nomura said in the note. “With the low CPI expected to continue, the BoJ will need to maintain its stimulus policies in a firm fashion and easy money will increase.”