Corporate bonds in Japanese currency

[ivanpgs]

Hi,

I have been thinking lately about different possibilities to invest differently from the commonly known mutual funds or stocks. I was searching for something with some fixed interest / coupon to receive in a fixed time frame and with relative low risk.

I have a couple of broker accounts, one in SBI and another in Rakuten. Then, I saw that SBI offers 円貨建債券, bonds in Japanese currency (yen), and some of them are rated by agencies, for instance: [Aa3（Moody's）/AA-（S&P）], which should be pretty low risk as compared to other investment like stocks. (or maybe I am wrong)

Let me give you a couple of examples with bonds to be issued soon: Sumitomo Fudosan and Sony. Both products are having an interest rate close to 5% after taxes and you have to keep the money there for 1 or 1 year and a half (depending which one you choose).

EB債（住友不動産）

お申し込み単位（額面） 50万円以上、50万円単位
利率 年5.96％（税引前）年4.749％（税引後）
発行体 香港上海銀行
発行体格付 Aa3（Moody's）/AA-（S&P
期間 約半年

株価連動債（ソニー）

お申し込み単位（額面） 50万円以上、50万円単位
利率 年5.60％（税引前）年4.462％（税引後）
発行体 クレディ・スイス・エイ・ジー
期間 約1年半
発行体格付 Aa3（Moody's）/A+（S&P）

And the picture of SBI:



I know there is still risk in these products and also the fact that you need to keep the money there until its maturity, but I was thinking in trying this sort of products in the future as long as they have good ratings and the companies are well known Japanese ones.

Has anyone in the forum tried this sort of products? Is this what it is called a corporate bond?

Thank you very much in advance!

[ivanpgs]

Thank you for your reply OkLah!

Actually, clicking on the details of the product it seems that is not as low risk as I thought it was. I will need to read more through the details, but it seems that depending on the fluctuations of the underlying product (I do not know what it exactly is) you can get in a "knocked in" status (ノックイン) and then you would get only 80% of the money that you invested instead of the 5% coupon.

Here some captures of it:

The Sumitomo Fudosan product details:




The explanation of some scenarios of the underlying product and when you get the expected 5% coupon of you get it in a "knocked in" status losing part of your investment. in this case -20%. Eow, that hurts!



Well, it seems I need to read more before being optimistic about a product. Thanks for the heads-up OkLah.

Anyway, did anyone here tried this before or even know about it? It is part of the 債券 (saiken - bonds) section and I always tend to be naive when thinking about bonds. Big mistake!

[Kanto]

Fixed interest / coupon to receive in a fixed time frame and with relative low risk.

These products simply do not exist in the current market. Credit is too cheap.

Bonds are great for diversification but do not expect much return.

Did you see that Rakuten has Morgan, Citi and Treasury bonds available?

[ivanpgs]

Fixed interest / coupon to receive in a fixed time frame and with relative low risk.

These products simply do not exist in the current market. Credit is too cheap.

Bonds are great for diversification but do not expect much return.

Did you see that Rakuten has Morgan, Citi and Treasury bonds available?

Bonds.jpg

Oh! I did miss that option, which could also be interesting.

About the subordinate bonds (such the ones for Citigroup or Morgan Stanley in the capture), I also found some subordinate bonds (劣後債, retsugosai) here issued by Rakuten with around 3% of coupon, but I was unsure about what really "subordinated" meant to say. I mean, it seems that if something bad happens to the issuer, like they bankrupt, then there will be other holders getting their invested money before you (the one holding the subordinate bond). But anyway, it's always good to have other options, specially the US Treasury bonds available to be purchased individually. I am currently holding bonds in iDeCo through the "野村外国債券インデックスファンドDC（野村外国債券ｲﾝﾃﾞｯｸｽﾌｧﾝﾄﾞ (DC)）" product (not much return as you mentioned, 5% after 4 years, but better that nothing I guess).

Thanks for providing that info!

[mighty58]

Many (most?) corporate bond issues nowadays seem to be linked to the stock price, which makes them very different to a traditional bond.

Reading the fine print, you realize that:
a. Your upside is limited (as with all bonds), but unlike traditional bonds, these contain a trigger event (and a fairly easily triggered event, in my opinion) that will immediately cash out the bond. If it's cashed out, you obviously will not get the coupon you were expecting.

b. Unlike traditional bonds, which will return your principle at the end of the term (barring bankruptcy or default), these bonds contain a trigger (again, a trigger that is very much within the realm of possibility) that will put your principle at risk.

Case in point is a 1yr SoftBank bond up right now offering a 9.25% coupon (which obviously sounds attractive) but if the stock price hits 105% of the current price (trigger A), the bond is immediately cashed out, and thus you miss out on your coupons. (You will get 5% back on top of your principle, however).
Alternatively, if the stock goes down 30% (trigger B), the "knock-in" is triggered, and your initial capital is no longer secure. What you end up getting back will now depend entirely on what the stock price is at the end of the term. If it's gone down 20%, your lose 20%, down 50%, you lose 50%. But even if the stock price skyrockets after trigger B, your gain is capped at 5% because of trigger A.

Only if the stock price stays within 70%-105% of the current stock price will this bond actually behave like a traditional bond. Given the regular volatility of the stock market, a stock could quite easily exceed this range. As such, it seems (to me at least) like a lot of uncertainty and risk to bear for an upside that is always capped. Especially as most people considering bonds are seeking more, not less, certainty.

[ivanpgs]

Nice explanation mighty58!

Yes, these bonds linked to the stock price and having such conditions (stock price stays within 70%-105% of the current stock price during the bond active period until its maturity) make the bond less attractive for those who seek for less risk indeed.

It has been a nice ride in this thread to understand how these sort of products work internally. I appreciate everyone's help here, as always!

In the end, it seems that if I want to keep "low risk" investments avoiding bank deposits or bank accounts with interests close to 0% (currently getting 0.10% in Rakuten Bank because I got the account linked to Rakuten Securities - what they called マネーブリッジ), I better stick to the low costs mutual funds for world bonds (excluding Japan), such the one I mentioned before.

[Kanto]

Nice explanation mighty58!

Yes, this bonds linked to the stock price and having such conditions (stock price stays within 70%-105% of the current stock price during the bond active period until its maturity) make the bond less attractive for those who seek for less risk indeed.

It has been a nice ride in this thread to understand how these sort of products work internally. I appreciate everyone's help here, as always!

In the end, it seems that if I want to keep "low risk" investments avoiding bank deposits or bank accounts with interests close to 0% (currently getting 0.10% in Rakuten Bank because I got the account linked to Rakuten Securities - what they called マネーブリッジ), I better stick to the low costs mutual funds for world bonds (excluding Japan), such the one I mentioned before.

US treasury notes are considered risk free when held to maturity. If you do not need to access the funds for the next 5-10 years they would be a better bet as you could at least hedge against inflation somewhat.

Americans have a tough time investing here, but they can also buy ee bonds and i bonds straight from the US treasury. I wish non-Americans could do this!