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Japanese Investors Dumpster Dive For Junk (Bonds)

Posted by: Kenji Hall on May 1, 2009

The global financial crisis left many Japanese investors with a lot less than they started off with. Japanese investment trust funds—which are similar to mutual funds in the U.S.—lost 37% in value, falling to $518 billion between October 2007 and March of this year. So how are Japanese managing the risk of their portfolios?

By investing in U.S. junk bonds.

That’s according to a Reuters report today that tells how Japanese, eager to invest in high-yielding securities, are piling into mutual funds specializing in junk bonds.

Thanks to the influx, the U.S. junk bond market is off to its most promising first quarter in 18 years. Among the favored funds is the Nomura U.S. High-Yield Bond Investment Trust, which has nearly quadrupled in size to 426 billion yen ($4.4 billion), since its launch in late January. Other firms are jumping in to get a piece of the action.

But there could be a price to pay for the high returns. Standard & Poor’s Rating agency, which like BusinessWeek is owned by McGraw-Hill, said last week that U.S. junk bond default rates may jump to 14.3% by March 2010 from 5.42% last month.

Reader Comments

The Mad Hedge Fund Trader, San Francisco, CA

May 1, 2009 2:18 PM

High yield bonds, less politely known as “junk”, have seen a dramatic improvement in the past month, making it the best performing fixed income asset class this year. With junk default rates expected to skyrocket this year, and a huge backlog of new supply overhanging the market, investors have been staying away in droves. Last year yields shot up as high as 25%, implying improbable future default rates of over 75%. The actual Q1 default rate came in at only 7.0%, up from 1.5% a year earlier, and rating agency Moody’s sees a worst case scenario of 14.6% this year. But a strong stock market and the opportunity cost of zero short term interest rates was enough to entice players off of the sidelines, who snapped up $7 billion in securities in April. The improvement in conditions is a welcome blast of fresh air to companies in debt heavy industries like REIT’s, hotels, and property developers.

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