Japan credit spreads tighten as Iraqi conflict draws to a close

Credit protection on Japanese names continued a tightening trend this week, on the back of positive sentiment globally with the war in Iraq nearing a close and the absence of negative news in the domestic market.

Reflecting the tightening trend, the CJ 50 index – a joint venture between Goldman Sachs, Credit Lyonnais, BNP Paribas and Bank of Tokyo-Mitsubishi (BTM) that tracks the movement of the 50 most actively traded Japanese credit default swaps – tightened by 4.12bp last week, to 47.78bp this week.

The market on the whole was better offered, say traders, with some of the semiconductor names narrowing by 30bp from earlier in the week following a rally in US technology stocks. The bid/offer credit default swap spreads on Fujitsu were quoted at 110/135bp, in from 160bp last Friday. The cost of credit protection on NEC narrowed from 108/120bp last week, to 82/96bp today.

Domestic investors were strong participants in the market. "We’ve had various comments out of life insurers saying they’re allocating more into fixed income, corporate bonds and foreign bonds," said one trader. "This is filtering through into the credit derivatives market."

There were also technical factors at play. “There seem to be remaining technical positions with a number of shorts out there, so you’re getting selling of credit protection into a market which is already short credit risk, and consequently you’re getting this tightening,” noted the trader.

The cost of protection on Japanese banks also tightened, with credit default swaps spreads for BTM narrowing from mid-spread 50bp last week, to 40/45bp today. Mizuho traded at 91/110bp, in from 100/130bp last Friday; while Sumitomo Mitsui Banking Corporation traded at 55/75bp this week.