(Bloomberg) -- The Bank of Japan’s interest-rate hike Wednesday will likely make investors more reluctant to hold long-maturity corporate bonds with higher risks of price drops, and debt sale trends in recent months suggest they’re already bracing for just that.
Since Japan’s fiscal year started in April, sales of longer yen company notes due in nine to 11 years have dropped about 5%, Bloomberg-compiled data show. The 10-year sector is particularly sensitive to the BOJ’s cuts in bond buying. That came as issuance of similar debt maturing in four to six years jumped 22%.
Signs of the central bank’s hawkishness — only about 30% of BOJ watchers predicted a hike as their base-case scenarios, according to a Bloomberg survey — indicate that investors may avoid riskier debt even more.
“Investor demand for long-term corporate bonds will probably fall due to higher rates,” said Kazuma Ogino, senior credit analyst at Nomura Securities Co. “Investors will likely want more five-year corporate bonds and fewer 10-year notes.”
That may reduce companies’ ability to hold secure funds for long periods via debt issuance. For investors in Japan’s corporate bonds, the impact of the BOJ’s efforts to ‘normalize’ monetary policy may become clearer: while they were able to earn higher returns putting their money in longer and riskier debt while the BOJ was conducting radical easing, they now need to weigh more the possibility of losses as interest rates may rise further.
Investors may also opt to put their money in government bonds rather than corporate notes to avoid risks as debt yields rise, said Shunsuke Oshida, head of credit research at Manulife Investment Management Japan. That may lead to spreads widening on corporate debt relative to sovereign bonds, he said.
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