Japan Credit Market Update: Spreads recover from panic selling

Japanese credit default swaps continued to recover this week, correcting a from a recent sell-off prompted by weak stock markets and general risk aversion on the market.

“The credit panic was overdone,” said one dealer in Tokyo.

Even Fujitsu, which had been under pressure from its credit rating downgrade and a scandal involving confidential defence information, saw the cost of its credit protection tighten. The computer maker’s credit default swap was quoted around 215bp Friday, down from 230bp a week ago and last week’s peak of 270bp.

However, one trader reckoned that Fujitsu remains under pressure and any negative news could send its credit default swaps up to the 300bp level. Any concern on Fujitsu will cause sharp volatility on the company’s credit protection because of its large outstanding convertible bond, he said.

“Every convertible bond desk in the world has Fujitsu on their books and they don’t want the credit exposure anymore,” the trader continued. Fujitsu sold ¥250 billion of Euroyen convertible bonds in May - Japan’s largest Euroyen convertible.

Another sector that will remain under pressure in Japan is the banking industry. “Banks lagged the tightening,” said the Tokyo dealer. Indeed, credit protection on Japanese banks remained wide last week amid the market’s overall tightening and tightened only slightly this week.

Concern that weak stock markets that will damage bank profits, talk of subordinated debt issuance and nonperforming loans still plaguing bank balance sheets will likely keep the pressure on bank credit protection, dealers said.

Sumitomo Bank was the most traded credit default swap, ending the week at 128bp, compared with 130bp last Friday, with good two-way demand.