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Japan Finance – US Loans in Excess of $1 Trillion, Japanese Hold Billions

Japan Finance - US Loans in Excess of $1 Trillion, Japanese Hold Billions

Japanese investors have now increased their total holdings of US corporate in a market, they own one-third if it, in which debt is now at $1 trillion, suggested by UBS Group AG. This drive to buy was driven by low yields as investors poured money into leveraged loans. This flow of cash means that credit was extended to firms with weak balance sheets. These securities were repackaged into so-called collateralized loan obligations of CLOs with some added bells and whistles to enhance protection for investors. This once popular market is now seeing some stress, some cracks forming in the system and some people are nervous. A record $2.53 billion was pulled out of these leveraged-loan funds the week of December 12. Large investors on the street are reducing holdings in waves.

Japanese investors have been purchasing the highest rated type called the AAA range of the CLOs because of better yields and the rating being much like sovereign debt, as stated in the UBS report. Japanese investors now hold about 33 percent of the total of this asset class. But the Japanese hungry and strong bid for US loans “will not be easily broken” according to one research named Stephen Caprio.

Just to clear up any questions. Keep in mind that Japan has lived on zero interest rates for years, and this is exactly why Japanese investors have gone overseas to buy assets, just for a small return as it surely beats zero interest rates. In these securities, US dollar assets are repackaged and placed in easy-to-use blocks that the Japanese investors are comfortable trading and even analyzing.

The leveraged loan market was only at $682 billion in 2014 but with the hunger from Japanese investors, looking for yield, it increased to $1.1 trillion in 2018. Low interest rates and yield-hungry investors have had massive impact on all bond markets as we well know.

Central bank normalization and economic slowdown in the coming months in 2019 will have impact on this market. How much? We do not yet know.

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