Credit structurers in Japan have noted a sharp shift in the correlation curve being driven by increased interest for mezzanine tranches in the typically stable market. "Firms have been pre-positioning themselves for a pickup in activity from the three-to-seven year range," said a senior credit structurer at a U.S. house in Tokyo, noting the recent easing of mark-to-market accounting rules for CDOs in Japan (DW, 4/14) should spur a strong increase in mandates.
As a result, usually-stagnant mezzanine spreads have tightened in by 10-15 basis points in the last few weeks. "Usually pricing is inelastic but this has been quite a surprise move," said the structurer.
Also, given the recovery story in Japan, more firms have been entering the credit derivatives market. A credit official at a bulge bracket house said this has resulted in more aggressive pricing. "Mezz had been priced fairly rich in Asia and there had been a nice, wide market but now we're seeing a lot more players out there hitting bids," noted the official.
