News (09.01.2017)
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City bonds or Municipality bonds - short Muni's - are quite popular in Japan. The size of those bonds per issue is not very big. Normally those bonds are issued at around 10bn yen and spread over 4-5 investors mainly insurance companies or pension funds. The spread can be up to 20bp or higher. For cities like Osaka the spread can be up to 50bp. The reason is that the fiscal situation in Osaka is seen as very critical. Nevertheless there was never a bond defaulted so far and the central governmet will support the municipalities. A close look to the conditions is necessary. In some cases there is no guarantee on the interest rates paid or there may be a clause that the city/prefecture can suspend the paying of those. In those cases a soft guarantee from the issueing city should be achieved.

Liquidity: Municipality bonds are quite liquid, because there RWA % is zero. That means banks can hold those in their books or use as repo material, which means that the bid/ask spread are quite low and more important there will be always be a party which will offer a price close to the presumed 'credit' risk. This is a significant difference compared to Japanese corporate bonds which face the problem that they have a RWA charge and that they need a dealer/broker or an immediate investor. In distressed markets - like in the last 6 month - this poses a challenge. Broker houses can not take the material in their books, because they have to back those up with their balance sheets, which is difficult in case of massive losses and deteriorated asset sides.

Information from the 'Local government bond association' can be found here: