Detail

1.
The Non-JGBs Market
4
1.1.
Market Evolution to Date
The Non-JGBs market’s practice of not pricing unlisted bonds led the market to trade in an
unusual fashion until around 1994. Until then, the Non-JGB market was an ideal market for
window dressing purposes. There was no convention for price adjustment operations, which
made possible for unlisted bonds to trade at unrealistic levels against true market levels. For
example, an investor can sell an underwater bond (for simplicity, assume an investor
purchased a new bond at par and now is trading at 95) at 100 and pay the 5 yen loss for the
new bond to be purchased (buy a 95 price bond at par). In a typical year, one or two months
before fiscal year end demand for Non-JGBs bonds would force JFM bonds to remain s 5 to
s 15 b.p. against similar maturity JGBs, and for Bank Debentures to remain s 20 to s 45 b.p.
against its JGB counterparts. This type of activity had little to do with rating or economics,
and with many market participants involved, which made this a normal trading practice for
the Non-JGBs market. Since then, with change in accounting regulations and the
establishment of price adjustment rules, Non-JGBs stopped trading more expensively than
JGBs starting from the 1997 fiscal year. However, complete elimination of price adjustment
practice did not come until it was legally abolished in 1999.
As for the Bank Debenture market, when I first began market-making of the product on the
screen at New Japan Securities in 1988, it was traded purely based on coupon differentials,
not based on maturity or issuer name as it is now. In an extreme case, two bonds with as
much as one-year difference in maturity would trade with the same yield, and on Simple
rather than Compounded basis. The tiering by issuer name began in 1992 when one life
insurance company sold NCB Bank Debentures in large size. After NCB, other debentures
followed (by order: LTCB, Zenshinren, Shochu and BoTM) and they traded off the most
liquid IBJ Bank Debentures. Even at that point, liquidity was the primary consideration
rather than rating.
However, towards the end of 1997, market participants became more concerned with credit
quality after the default of Yamaichi Securities. Since this occurrence and with the Russian
Crisis, which followed in 1998, Bank Debentures began to reflect credit rating differences.
Given this shift to rating-based trading , liquidity deteriorated considerably, and trading
volumes continue to worsen as liquidity is no longer the primary trading consideration in this
market.
The corporate market has always existed mainly for buy-and-hold investors, and for this
reason, secondary market trading was minimal, and bonds rarely even traded. Since there
were very few bonds to trade, all bonds traded off JGBs, and at incredibly tight levels. The
Yamaichi debacle, the Russian shock, and large supply in the second half of 1997 all
contributed to a large sell-off, pushing spreads back to previously cheaper levels. However,
once supply diminished in 1999, spreads immediately returned to their expensive 1997 levels.
It is difficult to imagine or guess at this point, if and when this market will trade at fair market
levels.
5
1.2.
Determinants of Interest Rates
1.2.1. Various Factors
A.
B.
C.
D.
E.
F.
G.
Rating
Liquidity
Coupon, Price (current coupon is preferable)
Maturity (the sector favored by the market at that point)
Trading Size
Issuer Name (name value)
Investor Needs
The above seven factors will determine how Non-JGBs bonds trade. The most important
factor, however, is G.
We attempt to rank Government Guaranteed Bonds (GGBs), Special Bonds, and Corporate
Bonds, just taking into consideration the above A (Rating), B (Liquidity), and F (Issuer
Name) factors only, since other factors will vary depending on market conditions at a given
point in time.
tight
?
spread
?
wide
JGB
GGB 1
GGB 2
GGB 3
GGB 4
GGB 5
Munis 1
Munis 2
Munis 3
Corps AAA (R&I)
?
Corps AA (R&I)
?
?
Corps A (R&I)
?
Special 1
Special 2
Special 3
Special 4
The ranking is based on the last two to three years’average.
How to view the above table:
The higher the ranking, the tighter the spread. The numbers of 1 and 2, for example, indicate
the ranking priority. Ranking differentiation is discussed in the next chapter. As for
Municipal Bonds, Munis 1 is tighter than GGB 5 and similar in spread to AAA Corporate.
6
1.2.2. Factors Affected by Investor Needs
As for G (Investor Needs), it will not be an overstatement to say that this is one of the most
significant factors which affect the Non-JGBs market. One needs to consider this factor after
taking into consideration the table in the previous page (1.2.1.) but the level of understanding
of client needs will vary depending on the sales’relationship to the clients. Given that NonJGBs do not have a uniform closing price, the firm with better investor understanding will
have a tighter closing price than others that necessarily do not.
To stress the point, a securities firm with no knowledge of investors’needs virtually cannot
participate in the over-the-counter market. OTC market trading becomes possible only with a
good trader and good sales coverage. In reality, majority of OTC market trading for NonJGBs is executed with clients as opposed to dealers. If a trader decides to pre-position
without understanding investors’needs, one will be forced to take a loss, unless sales
coverage is superior. Taking such a loss is very painful, as the trader can lose as much as 10
b.p. instantaneously. This market only starts by working investors’needs first.
As for C (Coupon, Price), D (Maturity), and E (Size), when market demand is strong, a
particular sector can easily tighten in spread by 10 to 15 b.p. against JGBs.
7
1.2.3. Factor Affected by Size
Outside of the basic determinants of what affects Non-JGB rate moves, size is another factor
to consider. Since levels will vary depending on issuer name and is difficult to generalize, the
normal market closing levels are meant for trade sizes between One to Five billion yen. For
this reason, trade amounts of less than One billion yen, 500 million yen, and 100 million yen
will all trade with a certain disadvantage. As for amount less than 100 million yen, new
issues will trade 10 to 20 cheaper than those for one billion issues. Once traded on a
secondary basis, can trade 8 to 12 b.p. cheaper (with no bids existent in some cases). Less
than 500 million yen issues will usually trade 1 to 2 b.p. cheaper, and for less than one billion
yen, 0 to 1 b.p. cheaper. Obviously, an exception would be if a broker were able to find a
matching bid; in that case, one can expect a higher bid.
Odd lot does not affect the Non-JGBs market, so price will not change on this factor alone.
Investors are well aware that they will not be able to buy anything if they have a strong
preference for even size lots.
1.2.4. The Taxable vs. Non-Taxable Consideration
In the Japanese market, spread will change significantly once an issue becomes taxable. In
actuality, one would think that building-in in the price the difference between the taxable
amount on the accrued interest and the non-taxable amount would suffice, but this is not the
case. Taxable issues are very illiquid in the secondary market. Investors prefer liquid issues
as a general rule, and for this reason, taxable bonds will tend to trade more than 10 b.p. cheap
to its non-taxable counterpart.
8
1.3.
Bid-Offer Spread (Normal Market Level)
Government Guaranteed Bonds
0.5 ~ 1 b.p.
Municipal Bonds
0.5 ~ 1.5 b.p.
Special Bonds
2 ~ 4 b.p.
Bank Debentures Bonds
IBJ, Shochu, Nochu
1 ~ 2 b.p.
LTCB
5 ~ 10 b.p.
NCB
5 ~ 10 b.p.
Corporate Bonds
Utility, NTT
1 ~ 2 b.p.
AAA (rated by R&I)
1 ~ 2 b.p.
AA
2 ~ 3 b.p.
A
10 ~ 20 b.p.
The above levels are for the last few years’average. However, with increase in the number of
players and subsequent pickup in competition, most bid-offer spreads are now within 0.5 b.p.
9
1.4.
Issuance Amount Outstanding
1.4.1. Total Non-JGBs Outstanding
as of Mar '99
(billion)
JGB
310,740
63.93%
21,156
10,917
13,536
34,022
42,652
44,959
8,116
4.35%
2.25%
2.78%
7.00%
8.77%
9.25%
1.67%
NonJGB Total
175,358
36.07%
Grand Total
486,098
100.00%
Govt. Gtd.
Special
Municipal
Public
Private
Corporate
Bank Debenture
Samurai
Govt. Gtd.
4.4%
Special
2.2%
Samurai
1.7%
Corporate
8.8%
Bank
Debenture
9.2%
Municipal
9.8%
JGB
63.9%
As described in the above pie chart, Non-JGBs amounts to over 1/3 of the total. Within NonJGBs, Municipal Bonds carry the largest percentage, close to 10%, followed by Bank
Debentures and Corporate Bonds. The recent trend in outstanding issuance is that with the
start of Bank SB issuance, since October 1999 Bank Debenture issuance is declining.
Government Guaranteed Bond and Municipal Bonds outstanding is increasing at a similar
pace to that of JGBs.
10
1.4.2. Government Guaranteed Bonds (“GGBs”, called “Seiho Sai” in Japanese)
Total Government Guaranteed Bond Issuance Amount Outstanding
Amount
(million)
percentage
Govt. Gtd. (Public)
Govt. Gtd. (underwritten by Trust Fund Bureau,Yucho,Kanpo)
Govt. Gtd. (Private)
21,156,990
8,960,614
95,300
70.0%
29.7%
0.3%
Total
30,212,904
100.0%
Govt. Gtd.
(Private)
0.3%
Govt. Gtd.
(underwritten
by Trust Fund
Bureau,Yucho,
Kanpo)
29.7%
Govt. Gtd.
(Public)
70.0%
Detail is provided in the following page.
11
Break down 1: Government Guaranteed Bonds (public)
Amount
(million)
percentage
Japan Financial Co. for Municipal Enterprise
Japan Highway Public Co.
Housing And Urban Development Co.
Japan Railway Construction Public Co.
Trans-Tokyo Bay highway Co.
Railway Development Fund
Japan Financial Co. for Small Business
Kansai International Airport Company ,Ltd.
Electric Power Development Company ,Ltd.
Shinkansen Holding Co.
Tokyo Expressway Public Co.
Japan National Oil Co.
East Japan Railway Company
Honshu-Shikoku Bridge Authority
Hanshin Expressway Public Co.
Water Resources Development Public Co.
Social Welfare & Medical Service Co.
Chubu International Airport Company ,ltd.
The Overseas Economic Cooperation Fund
The Hokkaido Tohoku Development Co.
Organization for Promoting Urban Development
15,265,700
1,382,580
781,780
572,000
486,620
485,250
400,350
335,260
290,820
273,720
207,860
152,470
142,260
120,250
80,150
50,000
40,020
26,630
25,000
20,000
18,270
72.2%
6.5%
3.7%
2.7%
2.3%
2.3%
1.9%
1.6%
1.4%
1.3%
1.0%
0.7%
0.7%
0.6%
0.4%
0.2%
0.2%
0.1%
0.1%
0.1%
0.1%
Total
21,156,990
100.0%
Japan Railway
Construction
Public Co.
Housing And
Urban
Development
Co.
3.7%
Japan
Financial Co.
for M unicipal
Enterprise
72.2%
Japan
Highway
Public Co.
6.5%
12
Break down 2: Government Guaranteed Bonds (private)
Amount
(million)
percentage
Serial "Ho" Japan Highway Public Co.
95,300
100.0%
Total
95,300
100.0%
Break down 3: Government Guaranteed Bonds (underwritten by The Trust Fund Bureau,
Yucho, and Kanpo)
Amount
(million)
percentage
Serial "Ni" Japan Highway Public Co.
Serial "Special" Japan Railway Construction Public Co.
Serial "Ro" Japan National Oil Co.
Serial "Ii" East Japan Railway Company
West Japan Railway Company
Serial "Ha" Japan National Oil Co.
Serial "Ii" Central Japan Railway Company
Serial "Ii" Metal Mining Agency of Japan
Serial "Ii" Japan Freight Railway Company
8,274,350
165,226
140,642
110,682
89,502
64,534
56,993
30,703
27,982
92.3%
1.8%
1.6%
1.2%
1.0%
0.7%
0.6%
0.3%
0.3%
Total
8,960,614
100.0%
To date, nearly 30 trillion yen worth of GGBs have been issued, and about 21 trillion is traded
in the market. The remaining amount, which is underwritten directly by the MoF Trust Fund
Bureau, Postal Savings (“Yucho”) and Postal Life Insurance (“Kanpo”) are not sold back to
the market at all. Of the 21 trillion marketable securities, more than 70% consists of JFM
bonds. In other words, JFM bonds take up the majority followed by Japan Highway Public
Co. bond, which is the next largest, but none the less at less than 7%.
Since 1999, there has been much discussion regarding the issuance possibility of NonGuaranteed and Guaranteed “Zaito bonds” by the government agency due to their
irresponsible public finance management, (this topic will be discussed later in more detail.)
Given that JFM bond outstanding comprises the largest percentage with in the GGB market,
changing such issuance to Non Government Guaranteed, with substantially reduce the
issuance outstanding of GGBs.
13
1.4.3. Special Bonds (Non-Guaranteed Bonds, issued by a Government Agency
, called “Tokushu Sai” or “Kosya-Kodan Sai” in Japanese)
Total Special Bonds Issuance Amount Outstanding
Amount
(million)
percentage
Special (underwritten by Trust Fund Bureau,Yucho,Kanpo)
Special (Private)
29,085,335
10,917,174
72.7%
27.3%
Total
40,002,509
100.0%
Detail is provided in the following page.
Break down 1: Special Bonds (underwritten by The Trust Fund Bureau, Yucho, and Kanpo)
Amount
(million)
percentage
Serial "Ii" Japan Highway Public Co.
Serial "Ii" Tokyo Expressway Public Co.
Serial "Ii" Housing And Urban Development Co.
Serial "Ii" Hanshin Expressway Public Co.
Serial "Ii" Japan Financial Co. for Small Business
Honshu-Shikoku Bridge Authority
Serial "Ii" The Hokkaido Tohoku Development Co.
Serial "Ii" Water Resources Development Public Co.
Japan Railway Construction Public Co.
Serial "Ii" New Tokyo International Air-Port Co.
Serial "Chi" Electric power Development Company ,Ltd.
Serial "Ii" Maritime Credit Co.
The Japan Regional Development Co.
Serial "Ii" Japan Small and Medium Enterprise Co.
Serial "Ii" Japan National Oil Co.
Serial "Ii" Transport Facility Maintenance Co.
Serial "Ha" Maritime Credit Co.
11,576,110
3,734,420
3,479,720
3,118,370
2,244,850
2,027,387
607,940
470,140
440,989
386,478
319,910
217,250
203,680
181,380
43,571
17,880
15,260
39.8%
12.8%
12.0%
10.7%
7.7%
7.0%
2.1%
1.6%
1.5%
1.3%
1.1%
0.7%
0.7%
0.6%
0.1%
0.1%
0.1%
Total
29,085,335
100.0%
14
Break down 2: Special Bonds (private placement)
Amount
Serial "Ii" Japan Financial Co. for Municipal Enterprise
Serial "Special" Honshu-Shikoku Bridge Authority
Serial "Ha" Japan Highway Public Co.
Serial "Special" Japan Financial Co. for Municipal Enterprise
Japan Financial Co. for Municipal Enterprise
Serial "Ho" Japan Railway Construction Public Co.
Housing Loan Co. (Saving)
Employment Promotion Co.
Serial "Special" Housing Loan Co. (Land)
Serial "Ni" Japan Railway Construction Public Co.
Serial "Special" Kansai International Airport Company ,Ltd.
Serial "Ro" Tokyo Expressway Public Co.
Housing Loan Co. (Land)
Serial "Ro" Hanshin Expressway Public Co.
Serial "Ni" Japan National Oil Co.
Serial "Ro" New Tokyo International Airport Co.
Serial "He" Japan Highway Public Co.
Serial "Uu" Japan Financial Co. for Municipal Enterprise
Serial "Special" Japan National Oil Co.
Serial "Ro" Maritime Credit Co.
Serial "Ha" Japan Railway Construction Public Co.
Serial "Special" Housing Co.
Serial "Ro" Housing And Urban Development Co.
Serial "Special" The Japan Regional Development Co.
Serial "Ro" Japan Railway Construction Public Co.
Serial "Ha" Hanshin Expressway Public Co.
Serial "Ro" Airport Environ Maintenance Co.
Serial "Ho" Airport Environ Maintenance Co.
Total
(million)
percentage
3,191,590
1,499,648
1,021,402
868,374
726,331
600,500
546,000
376,200
370,613
365,174
285,320
179,450
178,896
137,560
125,200
100,500
68,500
62,500
56,600
46,070
39,580
25,463
20,000
15,550
3,816
3,217
2,824
296
29.2%
13.7%
9.4%
8.0%
6.7%
5.5%
5.0%
3.4%
3.4%
3.3%
2.6%
1.6%
1.6%
1.3%
1.1%
0.9%
0.6%
0.6%
0.5%
0.4%
0.4%
0.2%
0.2%
0.1%
0.0%
0.0%
0.0%
0.0%
10,917,174
100.0%
The so-called “Special Bonds” (called “Tokusyu Sai” in Japanese) are Non-Government
Guaranteed Bonds issued by a Government Agency. They are also occasionally referred to as
“Kosya-Kodan Sai”. Most of the Agencies issue both GGBs and Non-GGBs. The market
outstanding is 40 billion yen; however, only 10 billion yen is traded in the market. Similar to
GGBs, JFM-issued bonds have the largest outstanding at nearly 30%.
15
1.4.4. Bank Debentures Bonds
Bank Debentures Bonds Outstanding
IBJ
Shochu
LTCB
Nochu
NCB
BoTM
Zenshin-Ren
Total
BoTM
7.2%
(billion)
Amount
percentage
13,276.6
29.53%
7,895.9
17.56%
7,573.0
16.84%
5,766.2
12.83%
4,197.3
9.34%
3,251.8
7.23%
2,998.6
6.67%
44,959.4
100.00%
ZenshinRen
6.7%
NCB
9.3%
IBJ
29.5%
Nochu
12.8%
LTCB
16.8%
Shochu
17.6%
At 45 trillion yen, Bank Debentures have the second largest share within the Non-JGBs
market, after Prefecture and Municipal Bonds. IBJ (or Ri-ki in Japanese) is the largest in
outstanding at 30% of the total.
Shokochukin Bank (commonly referred to as "Shochu" or "Ri-Sho" in Japanese for Shochuissued Bank Debenture), LTCB ("Ri-Cho") consist of 13 to 18% if the total. NCB ("RiShin"), BoTM ("Ri-To") and Zenshinren Bank ("Ritsu-Ren") follow. With the start of Bank
SB market, BoTM discontinued its Bank Debenture issuance from October 1999 on, and
combined with the fact that LTCB and NCB are no longer issuing. Bank Debenture market
outstanding is expected to diminish in size, in the coming future.
16
1.4.5. Corporate Bonds
Corporate Bonds Outstanding
Amount
Elec. Pwr. , NTT
Tokyo
Chubu
Kansai
Tohoku
NTT
Chugoku
Hokuroku
Hokkaido
Shikoku
Kyushu
Electronics
Rail Road
Trading
M etal
Telephone
Automobile
Banks
Other, Service
Chemical
G lass,Paper,Rubber,Cement
Retail
Real Estate
Transportation
Non-Ferrous Metal
Food
Construction
M achinery
Oil,Coal
Pharmaceutical
Total
Chemical
2.9%
(billion)
percentage
5,720.0
2,311.7
1,823.5
1,562.7
1,383.7
1,263.6
578.1
468.0
450.0
181.9
13.41%
5.42%
4.28%
3.66%
3.24%
2.96%
1.36%
1.10%
1.06%
0.43%
3,997
2,864
2,030
1,976
1,881
1,793
1,739
1,375
1,248
1,213
1,124
1,068
1,054
883
789
750
603
376
147
9.37%
6.72%
4.76%
4.63%
4.41%
4.20%
4.08%
3.22%
2.93%
2.84%
2.63%
2.50%
2.47%
2.07%
1.85%
1.76%
1.41%
0.88%
0.34%
42,652.1
100.00%
Others
18.8%
Elec. Pwr. ,
NTT
36.9%
Other,
Service
3.2%
Banks
4.1%
Automobile
4.2%
Telephone
4.4%
Metal
4.6%Trading
4.8%
17
Rail Road
6.7%
Electronics
9.4%
Corporate Bonds have an outstanding of 42 trillion yen, of which about 16 trillion yen (or
about 37%) consists of Electric Power (or Utility) and NTT bonds. Of the Electric Power
names, Tokyo Electric (TEPCO) has the largest outstanding at nearly 6 trillion yen. Since the
figures are only available through September 1999, no data was available for Bank SB issues.
Bank SBs are issued four times a year, with each issuance expected to be around 500 billion
yen, and annual issuance of around 2 trillion yen. Since minimum required maturity for Bank
SBs are 3 years, in three year's time, it will become at least a 6 trillion-yen market, making it
the second largest after Electric Power Bonds. In terms of individual issuance size, Bank SBs
will become one of the most liquid bonds within the Corporate Bond sector.
18
1.4.6. Prefecture & Municipal Bonds
Prefecture & Municipal Bonds Outstanding
Public
Tokyo
Osaka Pref.
Osaka City
Yokohama City
Aichi Pref.
Hokkaido Pref.
Kanagawa Pref.
Hyogo Pref.
Saitama Pref.
Shizuoka Pref.
Chiba Pref.
Nagoya City
Fukuoka Pref.
Kobe City
Nagano Pref.
Kyoto City
Hiroshima Pref.
Sapporo City
Fukuoka City
Kawasaki City
Miyagi Pref.
Kyoto Pref.
Niigata Pref.
Akita Pref.
Gifu Pref.
Okayama Pref.
Ibaraki Pref.
Hiroshima City
Shiga Pref.
Toyama Pref.
Tochigi Pref.
Yamagata Pref.
Nagasaki Pref.
Nara Pref.
Kitakyushu City
Mie Pref.
Aomori Pref.
Gunma Pref.
Iwate Pref.
Ehime Pref.
Kumamoto Pref.
Fukushima Pref.
Sendai City
Kagoshima Pref.
Tokushima Pref.
Fukui Pref.
Yamaguchi Pref.
Kagawa Pref.
Wakayama Pref.
Chiba City
Kochi Pref.
Tottori Pref.
Yamanashi Pref.
Shimane Pref.
Miyazaki Pref.
Ishikawa Pref.
Ooita Pref.
Saga Pref.
Okinawa Pref.
4,115,297
842,320
1,087,193
1,044,337
361,090
479,230
479,838
432,482
451,743
476,208
388,633
550,643
185,926
317,858
96,160
308,202
127,820
372,044
249,869
268,576
189,542
145,915
66,160
66,400
133,800
142,259
112,240
45,000
13,536,785
Private A
4,887,509
2,232,008
1,008,814
1,013,147
1,652,218
1,308,360
1,253,143
1,187,431
846,831
760,581
833,123
658,076
883,697
608,194
703,836
480,599
611,859
343,995
436,789
360,147
406,788
439,949
477,334
460,063
447,682
447,399
376,097
294,413
395,926
394,266
378,710
368,885
368,673
367,503
218,081
341,087
336,113
331,960
317,432
315,564
313,354
311,190
192,146
301,347
300,881
295,106
277,441
276,401
259,381
200,880
242,501
231,628
228,768
211,682
205,043
188,571
170,470
141,830
119,424
56,093
67,274
36,380
11,029
80,750
16,548
223,619
139,098
4,362
138,542
36,659
10,685
318,995
4,009
8,375
1,010
13,293
28,737
4,353
159,406
6,885
51,512
39,743
10,090
59,917
243,251
14,063
21,154
6,658
23,609
17,537
161,747
29,092
40,123
6,330
66,276
17,619
135,072
3,244
6,643
46,185
71,619
136,818
2,717
1,563
35,372
10,086
32,373
40,177
41,469
4,106
4,162
20,502
61,442
185,457
246,999
35,869
51,120
Private
Total
4,887,509
2,288,101
1,076,088
1,049,527
1,663,247
1,389,110
1,269,691
1,411,050
985,929
764,943
971,665
694,735
894,382
927,189
707,845
488,974
612,869
357,288
465,526
364,500
566,194
446,834
528,846
499,806
457,772
507,316
619,348
308,476
417,080
400,924
402,319
386,422
530,420
396,595
258,204
347,417
402,389
349,579
452,504
318,808
319,997
357,375
263,765
438,165
303,598
296,669
312,813
286,487
291,754
241,057
283,970
235,734
232,930
232,184
266,485
374,028
417,469
177,699
170,544
34,022,326
3,347,818
37,370,144
19
Private B
as of Jun '99
(million)
Grand Total Percentage
9,002,806
3,130,421
2,163,281
2,093,864
2,024,337
1,868,340
1,749,529
1,843,532
1,437,672
1,241,151
1,360,298
1,245,378
1,080,308
1,245,047
804,005
797,176
740,689
729,332
715,395
633,076
755,736
592,749
595,006
499,806
457,772
507,316
685,748
442,276
417,080
400,924
402,319
386,422
530,420
396,595
400,463
347,417
402,389
349,579
452,504
318,808
319,997
357,375
376,005
438,165
303,598
296,669
312,813
286,487
291,754
286,057
283,970
235,734
232,930
232,184
266,485
374,028
417,469
177,699
170,544
17.7%
6.1%
4.2%
4.1%
4.0%
3.7%
3.4%
3.6%
2.8%
2.4%
2.7%
2.4%
2.1%
2.4%
1.6%
1.6%
1.5%
1.4%
1.4%
1.2%
1.5%
1.2%
1.2%
1.0%
0.9%
1.0%
1.3%
0.9%
0.8%
0.8%
0.8%
0.8%
1.0%
0.8%
0.8%
0.7%
0.8%
0.7%
0.9%
0.6%
0.6%
0.7%
0.7%
0.9%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.5%
0.5%
0.5%
0.5%
0.7%
0.8%
0.3%
0.3%
50,906,929
100.00%
Prefecture & Municipal Bond market is a 50 trillion yen market, and its outstanding continues
to grow in size. The private issuance market is larger than that of its public counterpart,
currently at 70% of the total market outstanding. Naturally, marketable size is larger for
private bonds. Private A Bonds (see Table) are usually underwritten by one securities house
and are virtually treated as a public bond for secondary market-market purposes. As for
Private B Bonds, while they are also underwritten by one house, it tends to be treated similar
to a loan, not trading at all in the market. Hence when we trade Prefecture & Municipal
Bonds in the market, one can almost assume that reason to differentiate between Public and
Private A Bonds as there are on material differences except in their issuance method.
Tokyo is the largest issuer amongst the Prefecture and Municipal issuers. As for callability
(par call) of Prefecture & Municipal Bonds prior to their originally stated maturity (this has
happened previously and has made investors wary due to cash flow uncertainty.), it is specific
to Private B Bonds only. As stated earlier, Private B Bonds do not trade in the market, and
those issues which were called, were done with the consent of the original underwriter. For
this reason, investors generally do not need to concern about the callability of certain Public
or Private A Bonds.
20
1.5.
Trade Volume
1.5.1. JGBs
(billion)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Super Long
10,221
16,958
17,468
42,820
44,334
48,638
31,466
54,422
71,558
56,998
Long-end
2,044,127
1,302,541
903,896
1,078,983
848,824
1,050,665
913,364
1,026,435
910,788
908,409
Intermediate
10,271
7,761
5,403
7,292
29,685
45,118
44,121
41,409
37,537
68,406
Total
2,064,619
1,327,260
926,768
1,129,094
922,842
1,144,420
988,951
1,122,266
1,019,883
1,033,813
Other
Corps
2,090
1,817
2,854
3,988
3,910
6,642
9,675
11,700
13,559
10,987
Samurai
1.5.2. Non-JGBs
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Municipal
Govt.Gtd.
Bank
Public
Private
Debenture
3,844
3,440
12,880
68,227
4,473
4,535
18,548
60,955
6,482
9,739
25,474
64,930
6,743
16,160
29,107
63,705
5,264
17,514
22,517
46,079
8,047
32,626
28,131
61,338
8,004
27,873
22,895
48,946
7,293
25,691
24,813
47,971
6,786
21,681
19,865
29,852
6,087
16,510
14,310
28,077
NTT
508
719
1,022
1,167
743
782
787
481
499
526
21
Elec.Pwr.
4,230
5,175
4,036
6,405
4,231
7,213
6,062
6,635
7,312
7,747
Other
Private
2,394
2,954
3,526
2,970
3,131
2,689
2,583
2,505
2,029
2,166
1,758
3,101
2,835
3,934
3,090
4,055
5,634
5,424
1,873
2,957
(billion)
Total
99,371
102,277
120,897
134,179
106,478
151,524
132,457
132,512
103,454
89,367
1.5.3. Percentage of Non-JGBs to the Total
JGB
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
NonJGB
2,064,619
1,327,260
926,768
1,129,094
922,842
1,144,420
988,951
1,122,266
1,019,883
1,033,813
99,371
102,277
120,897
134,179
106,478
151,524
132,457
132,512
103,454
89,367
Total
2,163,990
1,429,538
1,047,665
1,263,273
1,029,321
1,295,944
1,121,408
1,254,778
1,123,337
1,123,180
Average
(billion)
Percentage
4.59%
7.15%
11.54%
10.62%
10.34%
11.69%
11.81%
10.56%
9.21%
7.96%
9.55%
As can be seen from the above table, Non-JGBs’trade volume amounts to close to 10% of
JGBs’total volume. However, since Non-JGBs trading is mostly done on need basis only, if
one excludes the short-term trading and proprietary activity within the JGBs volume, NonJGBs percentage would be very high. In other words, a securities house cannot do client
business without Non-JGBs. In addition, unlike JGBs, it requires much time and patience on
the part of market makers to understand this market, given its irregular and unusual ways.
However, once understood, returns can be quite rewarding.
Up until 1997, the movement in Bank Debentures affected the intermediate sector of the yen
curve, including JGBs, as Bank Debentures enjoyed a 40% share of the curve at the time.
Since 1998 when NCB had its problems, trade volume dropped significantly and continues to
drop to date. Contrary to this trend, with the increase in outstanding size, Corporate Bond
trading volume is picking up substantially and is expected to continue its growth going
forward.
22
1.6.
Public Bond Reference Price Set by The Japan Securities Dealers’
Association (JSDA)
Since 1990, the Japanese Security Dealers' Association began publishing the so-called "Basic
Reference Price". Since the Non-JGBs market always existed as an over-the-counter market
with little inter-dealer trading, it was always difficult to determine what the fair market price
was, since unlike JGBs there were no public closing prices available. Only a handful of
traders of brokers can quote a fair market price. The basic reference price system was
established to increase transparency, and to enable pricing based on close to real market
levels.
The method of this system was based on taking the average of several dealers' end of the day
posting prices. At the start, the pricing was done on a weekly basis, with only a small number
of issues being priced. Needless to say prices were quite different from where they needed to
be priced. Since this Basic Reference Price was based on actual bond dealing prices for retail
investors, the guess is that many securities’companies were pricing the bid levels at lowerthan-market levels in order to promote then respective retail businesses.
From 1997 on, pricing requirement changed to daily, and the number of bonds to be priced
increased (currently the number of Non-JGB bond stands at around 3500). While the pricing
is becoming more realistic, especially for GGBs or Bank Debentures, pricing for Corporate
Bonds is still for far from fair market levels. Realistically, no one trader is able to price so
many issues on a daily basis. Many houses are only using junior traders to quote Basic
Reference Prices, and those levels are not useful enough to track. If one wishes to use such
data, it should be to track the trend, not to follow the actual daily spread movements. In the
domestic market, prices not only reflect credit rating but also the industry and name. In
addition, same-rated same-issuer bond will trade at a different price depending on whether it
is priced at an over or under par basis. Even for a trader like myself who has been in this
market for over ten years, valuing all bonds in the Non-JGBs universe will take up a full half
day. However, since many investors also use this Basic Reference Price for book value, any
bond which trades under this price will be bought, and vice versa.
23
1.7.
The Basic Trading Style
Any buying or selling in Non-JGBs is directly related to clients' investments needs. Shortterm trading or proprietary trading is non-existent in this market. For this reason high level of
market expertise is required to gain client credibility. In this case, firm’s name value is much
less important than sales capability to capture client flow.
Once the trading side understands clients' needs, needs to position for such flow. In other
words, one can not position for bonds, which are not in demand at that time. A firm that
collects the most information regarding client needs and can price appropriately will dominate
the market. Close coordination between sales and trading is a requirement.
Any client information is not insignificant. Client feedback enables better pricing, which
leads to execution.
The only firms that can provide a bid anytime for bonds outside of GGBs, Prefecture &
Municipal Bonds, Bank Debentures (BoTM, IBJ, Shochu, Nochu, Zenshinren), higher than
A+(rated by R&I) or Baa2 (rated by Moody's) rated Corporate Bonds have specific client
needs. The rest of the market will only price if they can work on an order basis. For those
bonds stated above, however, pricing speed will be required, as competition is keen.
Even for relatively liquid names such as GGBs, Municipals, Bank Debentures, Elec. Power,
NTT, the order is placed by the sector (remaining life) and “grade”. (Grade explained later).
For example, if an investor wants to purchase the Municipals Bonds with YTM of 5 years, the
order would usually be "interest to buy 5bill of Municipal “second grade” (“6 biggest cities”)
with YTM 4.5~5.5y". Since each individual bond is very illiquid in the Non-JGB market,
trading by specifying a certain sector and grade enhances execution possibility and liquidity.
It is virtually impossible to find bonds by specifying name and a particular tranche.
[Example]
1) GGB “first grade” (“JFM”) for 4.5 to 5.5y at JGB curve +10bp
2) Municipals “first grade” (“Tokyo Metro”) for 3 to 4y at JGB curve +15bp
3) Bank Debenture “IBJ” for 2 to 4y at Libor + 10bp
4) Elec. Pwr. for 3 to 7y at JGB curve + 13bp (Each Elec. Pwr. names traded at same
spread)
24