Japan’s love affair with the country’s government bonds is fading as nearly flat bond yields are encouraging more of the country’s investors into other highly-rated bonds that offer higher yields.
The search for yield is boosting demand for Japan’s residential mortgage-backed securities (RMBS) among both Japanese and offshore investors, as these securitised credits are not only rated as higher than the sovereign, but also give investors higher returns. The five-year RMBS in Japan roughly yields 50 basis points (bp) over underlying JGBs.
“You know how much the five-year [government bond] yield is currently? It is 10 basis points. Naturally, they can pick up five times more just on the spread on JRMBS,” according to a Japanese structured finance banker. “Plus, for the 10-year base rate, it’s around 70bps. So on that one, in total investors can pick up 120. Would you still buy JGBs?”
Japan’s Housing Finance Agency (JHF), which issues roughly 90% of the country’s total RMBS, said it will be raising its annual issuance for the financial year starting April 2013 to ¥1.85 trillion (US$19.8 billion), which is an increase from ¥1.71 trillion for the financial year ending April. Yuji Date, director of the market operations department at the state-run agency, added that the supply of RMBS will also increase because a rising consumption tax in 2015 will persuade more home buyers to take out mortgages.
In addition to higher yields compared to government bonds, Japan’s RMBS have high credit ratings due to strict underwriting standards and the strong ability for Japanese borrowers to repay their mortgages. Most of the RMBS issued by Japan’s securitization agency has an effective rating of ‘AAA,’ as was the case in its most recently priced deal by JHF on February 20-- a ¥102.5 billion issue with a coupon of 1.25%.
JHF is rated ‘AA-‘ by Standard & Poor’s, while its sovereign ratings of ‘AA-‘ by Standard & Poor’s, ‘Aa3’ by Moody’s and ‘A’ by Fitch.
The A-rated agency and its issuance is attracting more investors after the European debt crisis cut the supply of ‘AAA’-rated credits, and the Japanese securitisation banker said he expects this to accelerate demand in the coming financial year commencing in April.
“The credit quality of new and existing mortgage loans will remain strong in 2013,” according to a January 15 report released by Moody’s. “Lenders will continue to originate new loans under strict underwriting standards for both owner-occupied residences and investment-purpose condominiums. In addition, lower interest rates after refinancing will help reduce repayment amounts.”
Japan’s 90-day plus delinquency rate is 0.14%, compared to 0.57% in Australia and 1.82% in the UK. JHF mandated Nomura, Morgan Stanley and Mizuho for a ¥20 billion deal to be launched this month. It issued ¥1.64 trillion in RMBS so far since last April.
The lure of fixed payments over a period of nearly a decade has been alluring enough for Japanese investors to also look at RMBS products overseas, especially as a weakening yen boosts international proceeds when remitted back to Japan. These factors are boosting inflows from Japanese investors into countries such as the United Kingdom, the Netherlands and Australia, which provide higher yields than Japanese securitised products.
“The Australian RMBS product is seen as supported by good underlying collateral performance and we haven’t seen a downturn in property prices overseas,” according to a Sydney-based credit analyst. “That is why one of the reasons why Japanese investors were looking toward the Australian RMBS market and also they will get a higher yield than investing in their domestic RMBS.”
Direct comparisons of yields were not available, but Australia’s RMBS that was issued by the Commonwealth Bank of Australia through a AUD2.3 billion (US$2.4 billion) issue on February 22 yielded 80bps over the bank bill swap rate that have a weighted average life of 2.3 years.