Japan Enters the High Yield Game With Latest Bond Offering

Negative interest rates in Japan may have prevented potential investors from even looking at bonds in the land of the rising sun, but the nation’s first publicly offered high yield bond could make them think twice–or not–given that the yield is a paltry 0.99 percent.

Nonetheless, for a country that has been mired in negative interest rates, this poses somewhat of a breakthrough. The issuing company, Aiful, a consumer lending company, broke the mold with its bond offering rated at BB by the Japan Credit Rating Agency.

Aiful raised eyebrows a decade ago due to questionable lending tactics, but this latest bond offering could spark some new investor interest. Analysts familiar with the Japanese bond market can’t say for certain that this will cause a new wave of high yield offerings–at least not yet.

“The issuance would be a milestone in Japan’s bond market, where companies haven’t felt compelled to sell speculative-grade notes as they’ve traditionally had close ties with banks, who can be more forgiving than bondholders in tough times,” wrote Finbarr Flynn and Komaki Ito of Bloomberg. “Aiful may price the 18-month yen bond with a coupon of about 1% by the end of this week.”

One High Yield ETF to Consider

Investors looking to gain exposure to equities, but also want the income component of high yield bonds simultaneously may look to the High Yield ETF (NYSEArca: HYLD) as an alternative.

U.S. equities rallied in 2019, and then took a dive following the latest U.S.-China trade deal news, but investors are always on the hunt for income–they could find those opportunities in high yield. As such, lower equity returns for the rest of 2019 could translate to more interest in high-yield funds like HYLD.

“Investors who want equity exposure in their portfolios may consider adding high yield bonds instead of traditional equities,” the fund specified in an email. “Historically, the returns of high yield bonds have been highly correlated with those of equities, while exhibiting lower volatility and drawdowns. With the current economic expansion rapidly approaching record territory and equity valuations stretched, high yield may serve as an attractive substitute for part of an investor’s equity allocation.”

HYLD provides exposure to a high income investment strategy that selects a focused portfolio of high yield securities. Utilizing a value-based, active credit approach to the markets, HYLD primarily focuses on the secondary market where there is less competition and more opportunities for capital gains.

The Portfolio Manager relies on their own fundamental credit analysis with an emphasis on a company’s ability to pay back their debts with free cash flow. HYLD seeks to provide high income and diversification benefits to the income portion of a portfolio.

Furthermore, its correlation with the S&P 500 gives investors an alternative to traditional equities.

“Investors may contemplate using high yield bonds as a substitute for equities in their portfolio given the strong historical correlation between the two asset classes,” the fund noted. “The chart below indicates that the historical correlation of the Bloomberg Barclay’s US High Yield Index with the S&P 500 is 0.59. Thus, an investment in high yield bonds has given investors equity-like exposure in their portfolios.”

The tide could turn for high-yield bond ETFs, especially now that the Federal Reserve is sounding more accommodative with respect to interest rate policy. Following the fourth and final rate hike of 2018, the central bank is now taking a more cautious approach with rates, which could lead to static rates through the rest of 2019.

For more market trends, visit ETF Trends.