Increasing volatility in both equities and rates in Japan has led to a flurry of structured credit issuance in the last couple of weeks. "This has been the most fun month in Japan in about a year," said one credit head in Tokyo, noting that with greater volatility in global markets in recent weeks, such as the sell off in emerging market equities and the talk of rate hikes in the U.S., credit spreads have widened in Japan.
Wider spreads mean derivatives houses are able to structure credit products at more attractive levels and credit investors, who have been staying on the sidelines, are coming back. "A lot of deals are being thawed out because they can now be executed," said a senior credit trader at a bulge bracket house. Credit derivative specialists said they have seen a pickup across the board in terms of product range but most significantly in first-to-default baskets. Market officials also expect greater demand for synthetic collateralized debt obligations in Japan if spread levels remain buoyant. They have not materialized yet, but some structurers said this is because they take several weeks to complete.
On the back of more structured products there has been an increase in credit-default swap trading volumes in the interdealer market. "The interbank market is getting more active," said Nobukazu Saeki, chief manager of the credit trading department at Mitsubishi Securities in Tokyo. Saeki continued that in recent weeks there have been over 10 trades per day, whereas in April only a handful of trades went through the market per day and in some days there was no action.
Traders said on average spreads have moved out around five-or-six basis points in the last few weeks. "In terms of percentage of spreads it's a big move," said one trader, noting that many Japanese credits trade at around 25-30 basis points. The CJ 50, a credit-default swap index tracking 50 Japanese names, widened from a mid of 21.25bps at the onset of the month to around 24.25bps last week.
