Japan’s convertible bonds comeback
Rising rates, zero-coupon issuance and a broad sector universe have brought convertible arbitrage back Before Citadel turned into a global juggernaut, Ken Griffin made his name trading convertible bonds from his Harvard bedroom. Griffin exploited an inefficiency, discovering that bonds didn’t seem to be priced consistently with stocks. This opportunity morphed into a durable and return-yielding…
Convertible bond arbitrage has experienced a resurgence in Japan, driven by rising interest rates, zero-coupon bond issuance, and a diverse sector universe. Ken Griffin, the founder of Citadel, pioneered this strategy in his Harvard dormitory, capitalizing on an inefficiency between bonds and stocks. Japan's convertible bond market was estimated at over $350 billion, attracting traders like Chris McGuire.
McGuire, who launched Phalanx Capital Management in 2004, identified Japan's unique characteristics, including cash-rich companies trading below book value and a broad range of industries issuing convertible bonds. However, as the decade progressed, convertible bond arbitrage became less appealing due to the financial crisis, short-selling restrictions, and the BOJ's easing policies.
McGuire briefly exited the market but returned with Eagles View Japan Management. The current favorable environment includes a soaring equity market, high borrowing costs, and zero-coupon convertible bonds. McGuire's strategy involves asset swap techniques, focusing on attractive credit quality and the distinct characteristics of Japanese equities.
Despite the smaller market size, at $20 billion compared to the US's $400 billion, the Japanese convertible bond market offers opportunities that are easily accessible and less prone to large hedge fund competition. McGuire's firm has returned 24% last year and is up over 20% so far this year, demonstrating the potential of this investment strategy.
Written by urgent.news from Hedgeweek's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
