Rising Japanese Interest Rates Threaten Higher Borrowing Costs for US Corporate Bond Issuers

Japanese interest rates have been rapidly rising over the past year, nearing 2.9% by mid-August. This increase has had a significant impact on corporate bond issuers in the US, particularly those with upcoming offerings or refinancings.

The Japanese government and private investors hold $1.2 trillion of U.S. federal debt, making them major investors in U.S. corporate bonds. With interest rates increasing, these investors are repatriating capital, which may drive up USD debt issuance costs for US issuers.

According to Lotfi Karoui, a multi-asset credit strategist at PIMCO, the accelerating reduction in U.S. Treasury purchases by non-U.S. public and private sector entities is evident in Japan's net selling of long-term U.S. debt securities. This trend may push up U.S. rates for issuers.

Amol Dhargalkar, senior managing director at Chatham Financial, notes that Japanese investors' selling pressure could lead to wider spreads on top of a higher benchmark rate for US issuers. Additionally, he expects more non-Japanese issuers to pursue yen offerings, taking advantage of growing demand for yen-denominated securities.