(Bloomberg) -- Japan’s corporate debt market has marked a milestone with a record-low 0.0000000091% yield.
The landmark bond sale from a Toyota Motor Corp. unit highlights how the Bank of Japan’s ultra-low rate policy is distorting the market: not just by guiding rates to new lows but also by creating opportunities for traders to still profit.
It works like this: the BOJ periodically buys corporate bonds rated BBB or higher and with a remaining maturity of one to three years on the secondary market, as part of its asset purchases. In the so-called BOJ trade, traders who correctly anticipate which securities it will buy can profit by purchasing those notes at issuance and later selling them to the central bank at a higher price.
“The BOJ distorts market prices by buying debt at a higher price than what’s sold in the market,” in a side effect of its bond-buying operation, said Toshiyasu Ohashi, chief credit analyst at Daiwa Securities Co.
That dynamic appeared to be at play in Toyota’s case.
The automaker’s unit, Toyota Finance Corp., will issue two tranches of 20 billion yen ($184 million) in three-year and five-year bonds each on Oct. 25, it said last week. The three-year notes will yield an unprecedentedly low 0.0000000091%. That means even if you bought 1 billion yen of the bonds and held them to maturity, you wouldn’t even make 1 yen.
Still, demand for the three-year notes was brisk, according to underwriters. It was stronger than for the five-year bonds because the shorter-dated securities would meet the central bank’s maturity requirements, allowing traders to bet that they may be able to sell later to the BOJ at a higher price.
Toyota Finance also has high credit ratings, with an Aa3 grade from Moody’s Investors Service and an AA+ score from Rating & Investment Information.
The central bank said last month that it will buy corporate bonds worth about 125 billion yen on Oct. 24 and about 100 billion yen on Nov. 29.
(Adds Toyota Finance’s ratings in the second-to-last paragraph)