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Think Samurais Over Japanese Government Bonds


These yen-denominated bonds can offer a higher yield percentage, but are not entirely without risks.

Last year, my firm suggested that Abenomics might be more beneficial for small-cap Japanese companies than large-caps. Sure enough, the Jasdaq (OTCMKTS:JDQTF) easily outperformed the Nikkei (INDEXNIKKEI:NI225). In fact, the Jasdaq is still doing better than the Nikkei. This year, the Jasdaq is up 3%, while the Nikkei is off almost 8%.

Even though Japanese interest rates are extremely low, there does seem to be some foreign demand for Japanese bonds. The MOF reported earlier today that in the week through January 24, foreign investors bought JPY 623 billion of Japanese bonds. This is the most in six months.

For those foreign investors who want to buy Japanese bonds and for Japanese investors who are investing in government bonds, there is an alternative worth considering: samurais. These are yen-denominated bonds sold in Japan by foreign entities.

Some investors do not like the samurai vehicle because they assume one has to take on credit risk. But this is not necessarily true. Japan's Bank for International Cooperation (JBIC) is a government institution and is planning on expanding a four- to five-year-old program under which it guarantees 95% of the principle and interest on samurai bonds issued by emerging markets. Most recently Panama, Tunisia, and Mongolia have participated in the program.

In essence, Japan is sharing its higher credit rating with lower-rated emerging market countries...for a price. That price is a higher yield than the Japanese government offers. For example, on December 25, 2013, Mongolia issued a 10-year yen bond, guaranteed by JBIC. It was offered at a 1.52% yield. That is twice the yield that the Japanese government bond was yielding on that day. It is not a completely free lunch in the sense that there is likely a liquidity premium embedded in it. With that said, as one might expect, the samurai held up better than other emerging market debt. At the end of last week, indicative prices suggested Mongolia's samurai was yielding 1.45%.

See more from Marc Chandler at his blog Marc to Market.

Twitter: @marcmakingsense
No positions in stocks mentioned.
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