Uridashi Bonds

New Zealand Herald last October.

Kiwi main on Japanese uridashi menu

12:00AM Monday October 23, 2006
By Rika Otsuka

With Japanese interest rates expected to rise slowly, the fondness of ordinary investors for higher-yielding uridashi bonds - foreign bonds sold to Japanese retail buyers - is still strong.

Uridashi bonds, sold directly to household investors in high-yielding currencies such as the New Zealand and Australian dollars, have totalled more than $1 billion and about A$1.45 billion ($1.64 billion) this month.

For months, currency strategists have thought rising Japanese Government bond yields and a big amount of maturing uridashi issues would undermine the Australian and New Zealand dollars as investors turned to other alternatives.

But that hasn't happened as Japanese investors eye higher interest rates abroad. Even currencies like the South African rand have become popular.

"Retail investors seem to be turning more active in foreign bond investment, given expectations that yield differences between the yen and other currencies may not shrink so easily," said an uridashi issuance official at a major Japanese brokerage.

The Bank of Japan raised the overnight call rate to 0.25 per cent from near zero in July, its first rate increase in six years, but has pledged to lift rates only gradually.

Short-term rates in Japan pale compared with 7.25 per cent in New Zealand, 6 per cent in Australia and 5.25 per cent in the United States.

The hefty uridashi purchases have helped the Australian and New Zealand dollars recover from a sharp slide earlier in the year that did little to dissuade uridashi buying.

After hitting nine-year highs against the yen last December, the Aussie plunged some 10 per cent against the yen over a four-month period and the kiwi tumbled 19 per cent through mid-May. But both have rebounded sharply.

One factor behind the heavy uridashi issuance - maybe the biggest factor, some say - is the redemption of a rash of bonds issued two or three years ago.

Both currencies have to deal with heavy uridashi and eurobond redemptions this year, totalling about US$19.4 billion ($29 billion) and US$9.1 billion respectively, said New Zealand-based broker OMFinancial - a trend seen extending through next year.

Market sources said about $950 million of kiwi uridashis mature this month. Since investors are likely to reinvest, brokerages in Japan have been busy arranging new kiwi and Aussie uridashis to meet the rollover demand.