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Tokyo FX funding costs sway pricing and issuance of US CLOs
A Wharton and UCLA analysis says changes in the cross-currency basis tightened new-issue AAA CLO spreads by about 22 basis points after 2019, as deal size became more responsive to dollar funding conditions.
The $1.3 trillion US collateralized loan obligation market can move not just with Wall Street conditions, but also with Tokyo, according to a Wharton-led study cited by LiveMint Markets.
The researchers link the swings to the cross-currency basis, which reflects the extra cost Japanese banks pay to obtain hedged dollar funding beyond normal interest-rate differentials. When that premium falls, banks are more willing to buy AAA CLO bonds at tighter spreads, encouraging managers to bring more deals to market, and the opposite happens when the premium rises.
The study examined how US CLOs responded to two Japanese shifts: new securitization rules introduced in 2019 and the Bank of Japan’s policy normalization starting in late 2023. It found that before 2019, Norinchukin Bank, known as the “CLO whale,” dominated Japanese demand and held about 55% of Japanese banks’ CLO investments, helping keep buying steady.
After tougher capital and due-diligence rules reduced Norinchukin’s dominance, the study said a 10-basis-point improvement in the basis tightened new-issue AAA CLO spreads by roughly 22 basis points, compared with about 3 basis points before. The authors also said the relationship changed again as the BOJ moved away from ultra-low rates, altering which Japanese buyers stepped in as funding costs shifted and affecting the financing channel for heavily indebted US companies.