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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.”