TheChek News Flow

DAX:

MDAX:

SDAX:

Japanese central bank maintained its target for the overnight call rate at a range of 0% to 0.1%

TOKYO—The Bank of Japan left its policy interest rate unchanged Friday but decided to reduce government bond purchases, signaling the possible beginning of quantitative tightening.

The Japanese central bank maintained its target for the overnight call rate at a range of 0% to 0.1%, the level where it has stood since the bank ended the world’s last negative interest rate policy in March.

In a decision seen as a step toward monetary tightening, the bank said it would reduce the amount of its monthly government bond purchases. It didn’t provide a new target, saying it would decide on a detailed plan for bond purchases over the next one to two years at the next monetary policy meeting in July after discussions with market players.

When the bank dropped its policy of controlling Japanese government bond yields in March, it had said it would continue buying JGBs worth around ¥6 trillion, equivalent to $38 billion, every month to maintain easy monetary conditions.

Recently, around ¥6 trillion of JGBs on average have been maturing monthly on the central bank’s balance sheet. Under the new policy, the bank’s JGB holdings are likely to start shrinking because it wouldn’t be buying enough to replace those that are maturing. The bank held more than half of outstanding JGBs as of the end of December.

Expectations for smaller bond purchases have been growing since the central bank cut back on the size of a daily bond-buying operation in May. That briefly pushed the yield on benchmark 10-year JGBs to a nearly 13-year high of 1.1%, before the yield fell back below 1%.

Gov. Kazuo Ueda has repeatedly said that the bank plans to buy fewer JGBs once it confirms the market’s reaction to the March policy changes.

The yen weakened after Friday’s move. It was trading at 157.85 to the dollar shortly after the move, compared with around 157.10 before the announcement.

The Japanese currency has remained near its lowest level in more than three decades despite the government’s recent yen-buying intervention as investors stick to the view that the interest-rate gap between the U.S. and Japan is likely to remain wide. Federal Reserve projections earlier this week showed that officials expect just one interest-rate cut this year, although recent data showed U.S. inflation eased in May.

Chinese companies rush to tap US convertible bond market

Issuers encouraged by ready pool of specialist hedge fund buyers for hybrid debt

Big Chinese companies are turning to the convertible bond market as a way of raising cheap cash from US hedge funds while circumventing investor concerns about political tensions between the two countries.

Traditional US equity fundraising routes such as initial public offerings and follow-on share sales have been almost completely shut to Chinese companies since the disastrous listing of rideshare group Didi in 2021, which delisted the following year after regulatory scrutiny.

In recent weeks, however, a string of large Chinese technology groups have raised billions of dollars through issuing convertible bonds. Such debt typically pays a lower coupon than conventional bonds, but can be converted into stock if a company’s valuation rises to a pre-agreed level.

Ecommerce groups Alibaba and JD.com and travel platform Trip.com have issued a combined $8.3bn worth of dollar-denominated convertibles over the past month, and analysts expect more companies to follow suit.

“It makes a lot of sense for these larger, megacap Chinese tech names,” said Michael Youngworth, a convertibles strategist at Bank of America. “I wouldn’t be surprised to see the trend continue.”

Companies are being encouraged by these bonds’ popularity with specialist hedge funds that can buy up the debt without worrying about political issues, say market insiders.

So-called convertible arbitrage managers try to make money by exploiting differences in the price and volatility of bonds compared with the corresponding equity. Traders hedge their bond purchases by shorting the company’s shares, giving them protection against overall market moves as well as against changes in the price of the bonds driven by company-specific news.

“It’s fair to say the Chinese converts are being priced for hedge fund buyers,” said a senior banker involved in one of the recent deals. “When a hedge fund buys this and puts a trade on, they’re playing with volatility and hedging it, they’re not taking a fundamental point of view.”

“As long as the [stock] that is listed in the US is liquid and available for borrow, then there will usually be that technical bid [demand] from the hedge funds, whether or not they have a fundamental view on the economy or [other] issues,” said Bryan Goldstein, an adviser at Matthews South who specialises in converts. “The megacap Chinese issuers fit that mould.”

Many hedge funds withdrew from the convertibles market after suffering large losses in the 2008 financial crisis when prices tumbled. But they have become more active in recent years, after issuance surged during the coronavirus pandemic when interest rates were cut to ultra-low levels. Convertible arbitrage funds have gained 5.1 per cent so far this year, according to data group HFR, after making 4.8 per cent last year.

BofA’s Youngworth estimated that such funds account for around two-thirds of bids on recent convertible deals. In some cases, they can make up almost the entire order book.

Matthews South’s Goldstein said foreign convertible issuers tended to be charged higher interest rates than an equivalent US company due to extra complexities, such as foreign exchange risk.

But the cash on offer is still much cheaper to raise and more freely available than it would be through traditional stock or bond markets.

Chinese companies have raised more than $75bn in US listings over the past decade, led by Alibaba’s bumper deal in 2014, according to Dealogic data. However, Didi’s botched IPO and broader concerns about geopolitical tensions have triggered a sharp drop-off in large deals.

Only one Chinese group has raised more than $100mn in a US IPO in the past three years — electric vehicle maker Zeekr, which raised $441mn last month.

With US interest rates held at a 23-year high this week, the low yield on converts is proving attractive to issuers.

Alibaba priced its convertible bond deal with a coupon of just 0.5 per cent, while JD and Trip achieved coupons of 0.25 per cent and 0.75 per cent, respectively. That compares with the average yield on dollar-denominated convertible bonds of 3.125 per cent, according to BofA’s Youngworth. The average US high-grade bond yield stood at around 5.4 per cent on Wednesday.

The recent deals by Chinese companies come amid a broader increase in convertible bond sales, with almost $41bn of new issuance so far this year, according to data from LSEG. That is the highest figure since 2021, during the borrowing frenzy in the pandemic. 

“The cost of capital of the convert has become incredibly compelling [for issuers],” said the senior banker who worked on one of the recent Chinese deals. “We think it will be a major financing tool as long as interest rates stay up here — it might not be as sexy as the IPO market, but it's a huge theme.”

Record $668mn loan boosts hopes for Miami’s luxury housing boom

Lenders are vying for projects such as PMG’s 1,000-foot tower, which is selling units for up to $90mn

A new Miami skyscraper where apartments will cost up to $90mn has secured a $668mn residential construction loan — the largest in Florida’s history — as the pandemic boom town’s heated high-end housing market shows no signs of cooling.

The Waldorf Astoria Residences by property developer PMG will be the tallest building in the Americas south of New York City, towering more than 1,000 feet over downtown Miami. The $668mn loan it has secured, from Bank OZK and Related Fund Management, breaks the previous record for a residential construction loan in Florida, a $600mn loan for the Cipriani Residences earlier this year.

“Miami is the most attractive market in the US right now for condo construction lenders with a high quality developer,” said Suzanne Amaducci, a top commercial real estate lawyer in the city. Even as commercial real estate lenders had grown more cautious, she said, condominium construction “deals in South Florida are still getting done because . . . of the demand and the lack of supply”.

Miami saw a population influx during the pandemic, as people moved in search of better weather, friendly taxes and looser Covid restrictions. The number of high earners flocking to Miami outpaced its supply of luxury properties.

“The buyer pool is deeper that it’s ever been, and . . . it’s people with high paying jobs who can afford to live in the buildings that are being constructed,” said Dan Kaplan, managing partner of the Miami-based PMG, a firm known for large residential projects.

The cost of condominiums has risen across the city to cover rising building and insurance costs and capitalise on the demand for luxury projects. The 387 units in the Waldorf tower range in price from $1mn for a studio, up to about $90mn for penthouses.

More than 90 per cent of them were already sold, the developer said, even though the foundation was yet to be poured. The loan was intended to cover the completion of the tower, expected in 2028, PMG said.

Loans for condo development in Miami have also grown larger as demand has inflated sale prices, increasing what developers could borrow against.

“You’re at a new bar in terms of cost,” said Kaplan, describing the record loan as “the most significant financing in the company’s history”.

Miami’s real estate market remains dogged by its reputation for booms and busts. But developers are adamant that the city’s condo market is significantly less risky than it was in the last downturn, after the 2008 financial crisis.

“I’m always the one saying ‘OK, things have been too good for too long what’s going to give?’ But Miami continues to surprise me in how resilient it is,” said JC de Ona, head of the south Florida division on Centennial Bank, which makes commercial real estate loans.

There was “real competition” between banks with the capacity to lend to the largest projects, he added.

The market for lenders has been buoyed by a regulation Florida introduced after the financial crisis, which mandated that developers sell condo units before breaking ground to ensure capitalisation and adequate demand. Buyers pay non-refundable deposits as high as 40 per cent of the purchasing price, which developers use to fund construction and cover borrowing.

“Miami continues to be an attractive market given its strong economic fundamentals,” said Brannon Hamblen, president of Bank OZK, one of the country’s biggest property lenders. The city is now the most significant part of the Arkansas lender’s loan book.

Regulations made the market safer, and the customer base was more stable, said Amaducci. “Miami is a much different place now. People want to live here. These condos are no longer second, third, fourth homes.”

Postcard from Switzerland: an off-piste adventure . . . in June

A series of late storms have drawn obsessive skiers back to the Alps

On Wednesday morning last week, Heathrow’s Terminal 2 was busy with passengers departing for summer breaks everywhere from Stockholm to San Francisco, but I think I was the only one carrying skis.

Skiing, as I’ve written before, is a slippery slope. It starts as an innocuous, one-week-per-year family holiday but can quickly become an obsession, driving you to obscure places and extreme lengths in search of snow. Social media has made it worse — from December until Easter, feeds are full of shots from the mountains, ensuring almost constant Fomo for those stuck at their desks. 

This year, though most Alpine ski resorts closed in April, the shots kept coming: fresh snow piling up on outdoor tables, tree branches bending under a white mantle, skis throwing plumes of powder into the sky. A series of late storms meant that winter seemed to be refusing to release its hold on the Alps. Engelberg in Switzerland got more than two metres of fresh snow at the end of April; in May, more snow forced the Giro, Italy’s national cycle race, to be rerouted.

I was on a beach in Cornwall, on a summer half-term break with my kids, when I got a message from Dan Loutrel, a mountain guide friend based in Switzerland. Conditions were looking good for the following week, should we go skiing?

And so, on June 5, I found myself packing Gore-Tex and down jackets into a bag that still had sand in it, and flying to Zurich for a discombobulating three-day break. Of course, there are a handful of ski areas that operate every summer, usually a few pistes up on a high glacier, typically used for slalom racers to train (ironically, the opening of one of them, Stelvio in Italy, has been delayed this summer because too much snow closed the access road). Our trip would be very different, an off-piste adventure, using skins attached to our skis to climb through the high mountains in search of cold snow and wild slopes.

At Zurich airport I left my travelling clothes in a locker and caught the train to Zermatt in an eccentric outfit: flip flops, shorts and rucksack, skis and boots in hand. A warm breeze blew in the open windows as the train made the final pull up the Mattertal valley, clouds of wildflowers covering the banks alongside, but up high the mountain tops sparkled white.

The following morning, Europe’s highest cable car took us up to the Klein Matterhorn (3,883 metres above sea level), injecting us straight back into winter. From there we struck out east into the Monte Rosa massif, traversing wide-open snowfields, my skis falling into a steady rhythm behind Dan’s. Off to the right we could look down into the green valleys of northern Italy, the villages of Champoluc and later Gressoney just visible thousands of metres beneath us. From the pure-white summit of the Castor we made our first proper turns, steep and committing but as soft as in midwinter.

In the afternoon, though, the wind got up and the weather got worse. At 4pm we were in a whiteout, fresh snow blowing around us, and Dan using GPS to navigate through the storm to find the Rifugio Gnifetti. Bizarre that it was only a fortnight before midsummer, but by now I had given up thinking about the real world down below.

A refuge has stood on this spot, 3,600 metres up on a rocky crest, since 1876; the current structure, built almost entirely of weathered wooden planks, dates from 1967. We clambered up metal rungs hammered into the rock to reach it, then gratefully fell through the door. Inside, the uneven floor and my lack of acclimatisation meant I couldn’t shake the sense that we were in a moving ship but, this being just over the border into Italy, it was nothing if not civilised. Bottles of red wine lined the walls behind the bar, a blackboard offered platters of cured meats and cheese, and Aperol spritz for €8 (already woozy, I stuck to water). Later there was a lengthy, four-course meal, served at a convivial table we shared with mountaineers from Chile and France, then a very short night.

We woke at 3.30am, set off an hour later and climbed to the Zumsteinspitze, at about 4,500m. We considered what would have been the descent of a lifetime, down into Italy’s Anzasca valley, but ruled it out because the previous day’s wind and fresh snow made it too risky. Instead we took a long, mellow run back towards Zermatt down the Grenzgletscher — slaloming between ice cliffs and crevasses for 9 kilometres, alone in a brilliant white world and with the Matterhorn poking up in front of us.

When the snow became too soft, we clambered over the moraine and up to the rack-and-pinion railway at Rotenboden. For the whole descent the only movement we’d seen had been the flow of blue, meltwater rivulets on the lower part of the glacier, and the scurry of a lone marmot, but cresting the ridge now we found dozens of tourists posing for selfies on the rocks around the station. We joined them on the train down into Zermatt, the summer air thick and soupy, but Dan pointed to clouds building on the horizon — “the next front coming in”. The ski season might have another few weeks yet.

Ministers trying to reconcile stances on how to plug a massive financing gap that some estimate at up to €40bn

German ministers are hurtling towards a showdown over how to plug a massive financing gap in next year’s budget, in one of the toughest tests of coalition unity since Olaf Scholz became chancellor.

The deadline for adopting a draft budget for next year in the Eurozone’s largest economy is July 3 — a task not helped by increasing frictions between the three coalition parties in the wake of the European elections.

Finance minister Christian Lindner has demanded big savings across the board to cope with a smaller tax take in Germany’s sluggish economy, which is only expected to grow by 0.3 per cent this year. But he is facing strong resistance from many of the key ministries affected.

“The parties’ positions are essentially irreconcilable and I don’t see yet how we get to an agreement,” said one MP with knowledge of the talks.

The conflict is a huge dilemma for Scholz, who is already reeling from a European election that saw his Social Democratic party (SPD) slump to just 14 per cent — the worst result in a nationwide vote in its 134-year history.

The chancellor is being squeezed between Lindner, a fiscal hawk from the liberal Free Democratic party (FDP) whom he has so far backed in the dispute, and the SPD and Green ministers in his cabinet who reject the proposed cuts.

“It’s still unclear whether Scholz can push through a deal,” said one senior official. “Will he be able to prevail over his own party?”

The budget row highlights the widening conflict at the heart of Scholz’s government, a marriage of convenience between tax-and-spend Social Democrats and Greens on the one hand and fiscally conservative, free-market liberals on the other.

Thorsten Faas, a political scientist at the Free University in Berlin, said the tensions over the spending plan were virtually unprecedented for postwar Germany. “All three parties seem to be pulling in opposite directions,” he said. “Everyone’s nerves are really frayed.”

The fronts in the conflict have only hardened since European elections that saw the combined share of the vote for the three government parties fall to just 31 per cent, down from 52 per cent in the federal elections of 2021 that brought them to power.

The opposition Christian Democrats won the election with 30 per cent, while the far-right Alternative for Germany came second with 15.9 per cent — its best ever result in a nationwide vote.

Since then, all three government parties have appeared even less willing to compromise over spending than they were before polling day.

Lindner and his FDP are insisting the budget must comply with the “debt brake” — the cap on public sector borrowing enshrined in the German constitution which has become a trademark of the party.

In recent days he has gone even further, calling for changes to “Bürgergeld”, the Scholz government’s system of welfare payments that critics say resembles unconditional basic income, a bugbear of the right. 

But the FDP’s determination to stay fiscally prudent has set it on a collision course with the SPD, whose tone has become much more combative since the European election.

Lars Klingbeil, SPD leader, has said the party should give its traditional voters more of what they expect from it — affordable rents, higher pay, good social care. “Our people want to see us fight,” he told ARD TV.

And Kevin Kühnert, SPD general secretary, warned Lindner against any cuts to welfare spending, saying savings “can’t come at the expense of social cohesion”. Left-of-centre parties are convinced that the surge in AfD support can be explained in part by popular anxiety about threats to Germany’s welfare state.

The SPD has proposed loosening the rules of the debt brake or putting up taxes. The Greens, who fear cuts to climate programmes and investments in clean tech, have made similar demands.

“What’s clear to everyone is you can’t plug a €40bn fiscal gap primarily through budget cuts,” said Sven-Christian Kindler, budget policy spokesman for the Greens.

But Lindner’s FDP is hanging tough. “What’s clear is that we Free Democrats will not cross the lines set out in the coalition agreement,” said Wolfgang Kubicki, the FDP’s deputy leader. “That means: there will be no tax increases with us and no unconstitutional violation of the debt brake.” 

The budget conflict dates back to earlier this year, when Lindner issued each ministry with a spending target for 2025 that was in many cases lower than their expenditures for the current year. Ten cabinet members complied, while five insisted on a higher budget.

For example, the international development ministry wants to spend €12.2bn next year, while Lindner is prepared to allocate just €9.9bn. Meanwhile the foreign ministry has presented a budget of €7.4bn for next year — about €2bn more than Lindner is prepared to give.

“That’s basically going back to the spending levels of 2017 — before the war in Ukraine, the war in the Middle East,” said one foreign ministry official. “What’s on offer isn’t even enough to cover our ongoing operational costs, let alone humanitarian aid and help for Ukraine.”

Insiders dismiss suggestions in German media that the budget crisis could trigger a break-up of Scholz’s coalition. “There will be a solution,” said the MP close to the negotiations, who said all sides would have to edge back from their maximum demands. “But it’s not going to be easy for anyone.”