With the Japanese fiscal year coming to an end, Wall Street is preparing for an influx of Japanese investment in fixed-income securities, particularly Treasuries and Ginnie Mae securities.
The possibility of a wave of more aggressive investment from Japan is usually "relatively strong" in April and May, said Henry Willmore, senior economist for Barclays Capital.
But this year, he said, reports are indicating that "there might be some reallocation away from dollars to euros."
One mortgage trader on Wall Street said that the market "has anticipated that there will be Japanese repatriation at their yearend," which comes March 31.
Ginnie Mae securities are direct obligations of the U.S. government and carry the same risk weighting as Treasuries, which makes them attractive to overseas investors seeking a haven from volatility in their home markets.
From Oct. 8-the height of the credit crunch-until March 17, spreads between Fannie Mae 6% mortgage-backed securities and 10-year Treasuries have narrowed by 57 basis points, said William J. Denton, vice president, secondary marketing for PNC Mortgage in Vernon Hills, Ill.
"There's been a slowdown in supply and an increase in demand from domestic accounts as well as traditional agency buyers Fannie and Freddie," Mr. Denton said.
He said Japanese investors have been selling mortgages and Treasuries through the first quarter, but "beginning April 1 they could be back in a big way in the U.S. market," especially buying Ginnie Mae securities.
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Japanese and other Asian investors have been active in Fannie Mae's and Freddie Mac's noncallable debt offerings, which are widely viewed as Treasury surrogates.
"The Japanese over time have been very active participants and buyers of benchmark notes," said Mehmood S. Nathani, vice president and assistant treasurer for Fannie Mae.
At the end of this month and in early April "I do expect them to become even more active," he said, "because the yearend does tend to crimp their participation a little bit."
On Friday, Fannie reopened the cash portion of one of its existing 5.125% notes for $2 billion. Preliminary indications are that the move will increase the total bond issue to $12 billion, making it the largest agency security outstanding in the market. Fannie's largest note now in the market is $9 billion.
The exchange program, announced March 10, offered holders of 71 issues of outstanding Fannie Mae notes with a balance of over $15 billion the opportunity to exchange them for the 5.125% Benchmark note. The company said nearly $6 billion of dollar-denominated, noncallable debt was offered for exchange into the benchmark note.
"We really view the exchange as the next change in maximizing the liquidity of our Benchmark securities," said Linda Knight, Treasurer at Fannie Mae. "The benefit for the investor is to exchange a smaller, less liquid security for a larger, far more liquid Fannie Mae security."
Fannie hopes to "consolidate" its issuance strategy through this exchange, she added.
February was one of Fannie's biggest months for issuing long-term debt, said Ms. Knight, noting that it was "really reflective of the growth" in Fannie Mae's portfolio activity. "Both the dealer and the investment community have told us that they are very interested in large, liquid deals."
With the Treasury not issuing as much as it has historically, she said, Wall Street and institutional buyers-both traditional buyers of Treasury notes-are interested in deals that "trade actively, and trade in very tight markets, and trade transparently."
