A Record $85 Billion Japan Bond Frenzy Is About to Reverse

(Bloomberg) -- Japan’s corporate bond bankers have been racking up underwriting fees from a record frenzy of note sales. They now face leaner months ahead.

Lured by ultra-low borrowing costs, companies sold 9.2 trillion yen ($85 billion) of notes in the first six months of the fiscal year started April 1, the most for any half on record. But issuance may slide to about 4 trillion yen in the second half, according to Daiwa Securities Co. That would be the lowest in four years.

Fund managers have already nearly reached their allocations for the year, leaving issuers without ready buyers for their debt, bankers say. Investors binged on blockbuster bonds from companies such as Takeda Pharmaceutical Co., SoftBank Group Corp. and Nippon Steel Corp. in the past few months. Sentiment is also looking shakier as the U.S.-China trade war drags on and a planned tax hike looms over Japan’s economy.

“Investors are close to reaching their annual budget purchase limits as so many bonds were issued in the first half,” said Takamitsu Kurokawa, managing director of debt syndication at Daiwa Securities. “They don’t need to be quite so hasty to snap up bonds, and so demand is expected to slow.”

Issuers may become risk-averse in the second half on concerns about whether the economy can withstand a sales tax increase to 10% from 8% starting on Oct. 1, traders said. While tax hikes are rarely popular anywhere, Prime Minister Shinzo Abe has decided to raise it in a weak economy.

Any slowdown in issuance may be more of an issue for bond arrangers than for companies themselves. Firms have loaded up on money that costs next to nothing, and are already sitting on record cash piles for use as a buffer against hard times.

In recent years, bond sales have tended to tail off in the second half, though the expected drop this time is more pronounced. It comes as spreads on Japanese corporate notes hover around an eight-year high.

Wasting No Time

In the past, investors waited until the end of the fiscal year to buy bonds, hoping rates would rise by then. But they often found themselves stuck with limited choices and expensive pricing.

They learned their lesson, so now they waste no time buying notes with attractive coupons as soon as they spot them in the beginning of the business year. That’s created the trend in which issuance tends to slump later.

Even as overall issuance looks set to slow, bankers expect more momentum with two other important trends.

One is the increasing use of the so-called pot system prevalent in the U.S. and Europe, in which syndicate banks share information among themselves and with issuers on buyers.

The other is further issuance of hybrid and sustainability bonds, which surged in the first half, inspiring issuers to explore these funding methods further, said Yosuke Todaka, joint head of the products business division at Mizuho Securities Co. Ltd.

--With assistance from Issei Hazama and Rie Morita.

To contact the reporter on this story: Ayai Tomisawa in Tokyo at atomisawa@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Beth Thomas

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