Bloomberg News

Tokyo Considers Dollar Bond Sale on Low Swap Rate: Japan Credit

October 13, 2011

Oct. 13 (Bloomberg) -- The Tokyo Metropolitan Government is considering its first sale of dollar-denominated bonds in a decade as global demand for the greenback pushes the cost to swap the proceeds into yen to near record lows.

The five-year dollar-yen basis swap rate, which measures the cost of exchanging interest payments from the U.S. currency into yen, fell to as low as minus 70 basis points yesterday, approaching the record of minus 73.2 basis points on Aug. 9, according to data compiled by Bloomberg. The swap was at 67.5 basis points as of 2 p.m. in Tokyo. A decline lowers the cost for Japanese borrowers to sell bonds in U.S. dollars and switch the proceeds into yen.

The government of Tokyo is taking advantage of a shortage in liquidity in U.S. dollars, which has kept the basis swap rate low. The Bank of Japan has maintained the overnight lending rate between zero and 0.1 percent for a year, while Federal Reserve Chairman Ben S. Bernanke this month said he’ll expand monetary stimulus if needed to spur consumer spending and stimulate the economy.

“We’ve taken an extensive look around the market and picked up on where the situation is favorable for a sale,” Yoshiko Aida, director at the Tokyo government’s bond section, said in an interview in her office on Oct. 4. “We can only sell dollar bonds if the cost of doing so is cheaper than domestic deals.” Aida will meet potential investors in Hong Kong today and Beijing tomorrow, she said.

Tokyo Metropolitan Government, which runs a municipality of 13 million people, is weighing the sale as part of its general funding needs, and not for any specific purpose, Aida said.

Dollar Funding

Development Bank of Japan on Sept. 28 sold $1 billion of dollar-denominated bonds. The lender priced the five-year securities to yield 45 basis points above the mid-swap rate, according to data compiled by Bloomberg. By converting the proceeds into yen, the spread equates to 27 basis points below equivalent Japanese government debt at the time of the sale. The state-owned bank yesterday paid 7 basis points more than sovereign bonds to sell 20 billion yen ($259 million) of five- year notes, Bloomberg data show.

The most recent dollar-denominated bond sale by a Japanese company was Toyota Motor Credit Corp.’s $320 million of floating-rate notes due in October 2013. The securities were sold by the financing unit of Asia’s largest carmaker on Oct. 7 at 45 basis points more than Libor.

Borrowers typically use cross-currency basis swaps to exchange floating-rate payments in one currency to another. The Japanese yen basis swap measures the cost of switching interest charges pegged to the dollar London interbank offered rate, or Libor, for rates linked to yen Libor. Japan’s rate has declined from this year’s high of minus 38.7 on Feb. 3.

Lehman Collapse

“This low level reflects a concern that getting dollar funds hasn’t been that easy, such as what we experienced after the collapse of Lehman Brothers Holdings Inc.,” Makoto Noji, a senior debt and currency strategist at SMBC Nikko Securities Inc. in Tokyo, said in a telephone interview yesterday. “We’ll see an increase in the trend of financing in dollars and swapping the proceeds into yen.”

Japan’s 10-year government bond yield rose 2 basis points to 1.015 percent as of 2:55 p.m. in Tokyo, after touching 0.965 percent on Sept. 22, the lowest since November, according to Japan Bond Trading Co. Trading of the securities was delayed today because of system problems.

The notes yield about 1.17 percentage points less than equivalent-maturity Treasuries, with the extra yield that U.S. notes pay widening from this year’s low of 0.73 percentage points on Oct. 3.

Credit Markets

The yen fell to 77.11 against the U.S. dollar as of 2:55 p.m. in Tokyo, 1.5 percent above the post-World War II high of 75.95 reached on Aug. 19.

Elsewhere in Japan’s credit markets, Korea Development Bank sold 53.7 billion yen of Samurai bonds yesterday, including 47 billion yen of 1.3 percent notes due next year, according to data compiled by Bloomberg. Mitsubishi Materials Corp. raised 10 billion yen from a sale of five-year, 0.79 percent bonds yesterday, the data show.

Mori Building Co., Japan’s biggest closely held developer, hired Mitsubishi UFJ Morgan Stanley Securities Co., Nomura Holdings Inc. and SMBC Nikko Securities Inc. for a sale of bonds, according to a faxed statement from Mitsubishi UFJ Morgan Stanley today.

Credit-default swaps declined, indicating an increase in perceptions of creditworthiness. The swaps show the cost of protecting fixed-income securities against default. The Markit iTraxx Japan index fell 2 basis points to 197.5 basis points as of 2:33 p.m. in Tokyo, Citigroup Inc. prices show. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

Government Guarantee

The Tokyo Metropolitan Government last sold dollar securities in 2001, when it raised $170 million from a sale of 6.125 percent bonds that matured in March, according to data compiled by Bloomberg. It is rated AA-, the fourth-highest investment-grade ranking by Standard & Poor’s, and one level above Development Bank of Japan, known as DBJ.

The municipality will have to pay a yield premium over the debt sold by DBJ because it has no dollar notes outstanding and its bonds aren’t backed by the state, Hiroaki Kurosawa, team leader for the Tokyo Metropolitan Government’s foreign bond team, said in an interview on Oct. 4. DBJ’s securities have a sovereign guarantee.

Public Debt

Kurosawa, who is accompanying Aida on the roadshows to China, said the city may have to pay as much as 15 basis points more than DBJ’s dollar-denominated securities.

The capital’s fiscal situation is the best among Japan’s municipalities, according to Aida. Tokyo’s outstanding debt was 7.6 percent of its 85 trillion yen gross domestic product as of the fiscal year ended March. It made up 17.9 percent of Japan’s economy in the year ended March 2010, according to a statement on the government’s website.

In contrast, Japan’s public debt was 199.7 percent of GDP in 2010, according to the Organization for Economic Cooperation and Development.

Tokyo Metropolitan Government’s most recent issue of foreign-currency denominated securities was a 318 million euro ($438 million) sale of 4.9 percent 2035 notes in January 2008, Bloomberg data show. It has 1.27 billion euros of bonds in the currency outstanding, according to data compiled by Bloomberg.

Investors in Japanese fixed-income markets are seeking alternatives to securities sold by energy companies, which diminished after the March 11 earthquake and tsunami that crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear power plant.

Yield Advantage

The city government paid 2 basis points more than sovereign debt on its 20 billion yen of seven-year, 0.58 percent bonds sold on Oct. 7, according to data compiled by Bloomberg.

The extra yield investors seek to own Japan’s municipal debt relative to government securities has averaged 9 basis points since July 7, after declining from the year’s high of 19 basis points on March 23 to the lowest since December 2003, according to a Bond Performance Index compiled by Nomura Securities Co.

Spreads on U.S. municipal bonds rated AA versus Treasuries averaged 19 basis points yesterday, down from 56 basis points April 25, according to an index compiled by Bank of America Merrill Lynch.

Attractive Yield

The yield Japan’s top-rated borrowers offer is attractive, even given the national debt burden, said Torbjorn Kronblad, a portfolio manager at Nordea Asset Management, who manages 1 billion euros of assets.

Kronblad has been buying shorter-maturity agency bonds that carry an explicit guarantee from the Japanese government because they offer an attractive yield advantage over similar-maturity U.S. Treasuries, he said in an e-mailed response to questions on Oct. 6 from Copenhagen. Kronblad declined to comment on a potential dollar bond sale by the Tokyo government.

Japanese companies raised 6.37 trillion yen from bonds this year, down 13.5 percent from 7.36 trillion yen of sales in the same period a year ago, according to data compiled by Bloomberg.

The extra yield investors demand to own Japanese corporate securities rather than government debt rose 2 basis points, or 0.02 percentage point, to 75 basis points yesterday, according to a Bond Performance Index compiled by Nomura.

“Not all Japanese borrowers can profit from a favorable move in the basis swap,” Masanori Azuma, managing director for capital markets at Nomura, which was a sale manager for DBJ’s sale, said in a telephone interview on Oct. 11. “Dollar bond spreads, including Nomura’s, have widened overall. So only those whose credit spread is kept within a certain level, in other words, the sovereign or the Tokyo Metropolitan Government,” are able to use the swap to their advantage, he said.

--With assistance from Saburo Funabiki in Tokyo and David Yong in Singapore. Editors: Beth Thomas, Shelley Smith

To contact the reporter on this story: Yusuke Miyazawa in Tokyo at

To contact the editor responsible for this story: Shelley Smith at

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