Such actions by Japanese investors, who have historically been among the largest purchasers of US corporations, may lower the liquidity of the world market and raise the risk of volatility. As per the statements of two bankers who requested anonymity because they were not authorised to talk in public, the demand for US firm debt from Asian investors, particularly in Japan, has already decreased significantly in recent times.
According to the most recent Treasury Department statistics, Japanese investors sold a record net $17.2 billion of US corporate debt in August as the assets lost appeal due to the highest hedging costs in more than 20 years.
The risk for investment grade credit is essentially that the BOJ normalises policies ahead of the next US recession, according to Steve Caprio, Deutsche Bank AG’s head of European and US credit strategy. Japanese inflows have prevented the spread of investment-grade credit from expanding during previous sell-offs. However, when it’s most required, this flow may be severely curtailed if the BOJ normalises policy.
If wealthy investors showed less interest in purchasing blue-chip debt, US corporations—which already have some of the highest financing costs since the financial crisis—would probably have to pay more to borrow money. The Bloomberg US aggregate index shows that yields have climbed to 6.07%, which is comparable to levels observed in 2009. Just over two years prior, they were less than 2%.
However, Fraser Lundie, head of fixed income at Federated Hermes Inc. in London, stated that “any reduction in foreign purchases needs to be seen in context of a public market credit space that is shrinking due to low issuance levels and market share erosion to private credit.” “In the current market environment, technicals are likely to remain well underpinned.”
According to a person with knowledge of the situation, the downturn has also affected collateralized loan obligations. At least one significant Japanese investor reduced its allocation to new CLO agreements by more than 70% due to the growing appeal of returns in their home market.
The individual said that the strength of the dollar has increased the value of their CLO holdings in local currency, making additions less enticing, while currency hedging expenses are also a factor in that choice, making domestic bonds even more desirable.
Despite selling off their corporate bond holdings, Japanese investors purchased the largest amount of US government bonds in six months in September, partly due to the fact that several insurers are now considering purchasing the assets without hedging. For instance, Sumitomo Life Insurance Co. could increase its holdings in foreign bonds even if it does not hedge against exchange rate changes.
Although “there are a set of investors who are waiting to get out of underwater hedged bond purchases that they have to hold to maturity,” according to Brad Setser, a senior fellow at the Council on Foreign Relations who studies capital flows and financial vulnerabilities, high yields from US bonds are still appealing to some credit buyers.
“I don’t expect the big ‘bid’ of the past—a hedged bid—to return, but I also don’t see any indications right now that there is a rush to sell off legacy bond holdings.”
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