Japanese structured credit: Don’t believe the spike
The consensus among structured credit bankers in Tokyo seemed to be that the local market’s reaction to the US sub-prime mortgage crisis was initially more dramatic than it needed to be.
The benchmark for investor perceptions of credit quality in Japan, the iTraxx Japan index, certainly registered a spike as the global repricing of credit developed. Having been stable at around 19-20 basis points for the first half of 2007, it widened steadily throughout July, hit a peak of 42bp in August and has been volatile ever since. Now initial optimism—based on Japanese investors’ tendency to avoid risky sub-prime based assets—is giving way to concern as credit problems become liquidity problems and assets unrelated to US mortgages start to suffer.
Speaking in August, Yasuhiro Shibata, general manager, global structured credit products at Mizuho, said: "The most outstanding feature of the last few days has been the huge volatility in iTraxx when it had been so stable or even tightening before. I think that a lot of this, however, comes from pro players such as hedge funds and investment banks. iTraxx’s movements here have a good correlation with Europe, which suggests that non-Japanese professional investors are arbitraging – iTraxx Japan is still cheap – as well as buying protection. Here we have far fewer pros playing with volatility."