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BOJ purchases blamed for distorting Japan corporate bond market

TOKYO -- Fixed-income investors in Japan are increasingly assessing bonds based on their likelihood of being bought by the central bank, rather than the creditworthiness of the issuers.

     "I would have bought it at all costs had I known that it was on sale," a fund manager at a domestic asset management institution said with frustration Friday. The fund manager learned too late from Japan Securities Dealers Association data that a Mitsui & Co. bond had been traded the previous day. The bond, with about three years to maturity, was traded with a yield of around negative 0.008% -- meaning that a buyer paid a high price and would incur a loss if the instrument was held until maturity.

     Still, the fund manager desperately wanted to get hold of the bond because he bets that debt issued by Mitsui and other trading houses will be picked up by the Bank of Japan in its bond purchase program. Even if an investor buys a bond with a subzero yield, the investor could sell it to the central bank for a higher price, the thinking goes.

     Since the BOJ pushed interest rates below zero, the effective yields on the debt it buys have fallen sharply.

     In the February purchase operation the average yield of successful bids came to negative 0.031%. The number will likely sink further into negative territory in this month's operation on Tuesday, said Hidetoshi Ohashi at Mizuho Securities, since the buying is expected to be more extensive.

     The central bank screens bonds by credit ratings and circulation levels, and caps its holdings for each issuer at 100 billion yen ($896 million) or 25% of the issuer's outstanding bonds. Maturity periods and new issues also come into play. Accordingly, each operation targets different bonds and the targets are not identified until right before the purchases.

     This uncertainty is causing swings in the corporate bond market.

     A Brother Industries bond was a recent victim, according to one investor. The yield on an order for the three-year Brother bond issued in November dipped to negative 0.01% in the secondary market last month amid speculation that it may be bought by the BOJ. But the BOJ apparently left it off the list, and the yield rose subsequently. The fluctuation may be attributed in part to changes in government bond yields, but the swings were still remarkable given that the company's creditworthiness remained unchanged.

     The impact is felt as well on demand for different maturity periods. The yield on AA-rated two-year bonds slipped this month below that on their one-year counterparts. This apparently is due to stronger investor interest in two-year debt, which falls square within the range of the BOJ program, which targets only one- to three-year bonds.

     "It goes to show that no one judges corporate credit risks seriously anymore," said Katsuyuki Tokushima at the NLI Research Institute.

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