The Tokyo Metropolitan Government priced a dollar bond on Tuesday at a level that divided opinion in the market.
Tokyo was looking for a modest $500m three year deal and capped the size from the start. Lead managers Barclays, Citi, Goldman Sachs and Morgan Stanley set initial price thoughts on Monday at 90bp over Sofr mid-swaps.
Investors placed $1.9bn of indications of interest — including $50m from the bookrunners — for the June 2026 bond at that stage. That encouraged the leads to tighten guidance to 87bp area over swaps when they opened the book on Tuesday morning.
Demand exceeded $3.3bn, including $100m from the leads, and they fixed the spread at 84bp. The final book was $4bn with the same lead manager amount.
A sovereign, supranational and agency bond banker away from the trade said the IPTs had looked “stunningly cheap” and that the deal was “hosed down with demand” because of that.
“They tightened 6bp, which is unheard of, and got a book of $3.3bn for a $500m no-grow," he said. "How they managed to talk the issuer into starting with that IPT, I don’t know.”
A banker at one of the leads disagreed, saying it was “disingenuous” to call 6bp an unusually large move from IPT for a Japanese issuer. He pointed to precedents by Japan Bank for International Cooperation and Japan International Cooperation Agency.
“JBIC regularly moves 3bp-5bp, and so does Development Bank of Japan and JICA,” he said. “JBIC moved 3bp on a three year, which was 20bp-30bp tighter than where JBIC was trading, so [for Tokyo] to move 6bp is not crazy, in my mind.”
The SSA banker off the deal said he thought the deal had been “completely mispriced”. Although he conceded that it did not look particularly cheap to Tokyo's outstanding bonds, he also compared it with other Japanese SSA issuers. He pointed to JBIC's $2.5bn April 2026 bond, priced last month at 47bp over Sofr mid-swaps from IPTs of 50bp, which he had spotted this week trading at 53bp.
Japan guarantees JBIC's bonds and they are rated A1/A+. Tokyo also has an A+ rating from S&P but no sovereign guarantee. Even after adding a 10bp spread to account for the lack of guarantee, the Tokyo deal still looked cheap, the banker argued. “Or there are five year JFM bonds, which are unguaranteed," he added.
Japan Finance Organisation for Municipalities, rated A1/A+, priced a $1bn five year (April 2028) last month at 81bp over Sofr swaps. The pricing did not move during execution.
A more recent pricing point was from sovereign-guaranteed JICA, rated A+. Last week it priced a $1.25bn five year at 76bp over Sofr mid-swaps, 4bp through IPTs.
Another senior SSA banker away from the deal was also surprised by the “optically large” spread from Tokyo. “Some would probably argue that some of the less liquid, less known names might require a larger spread,” he said. “But from the outside looking in, the spread was very high, especially for Japanese issuers who are so focused on price that it is unusual to see a deal offering that much value.”
‘As skinny as possible’
Another of Tokyo’s lead managers, however, argued that the deal had been priced fairly compared with other non-government-guaranteed Japanese SSA paper and Tokyo's own secondary curve. “Pinpointing fair value is tricky with such an issuer, given the less liquid nature of it,” that banker said.
Tokyo’s 1.125% May 2026 bond, issued in 2021, was the closest comparable. It was trading at 88bp over mid-swaps on Monday morning, according to the lead banker.
“This comp had been raised by investors on the [one-on-one] calls we conducted last week,” said a third lead manager. “Seems to me that we offered [at IPTs] as skinny a concession to that secondary as possible.”
He said the leads recognised that the old Tokyo bond was from two years ago and that it “may not be the most liquid reference point”.
Another reference was JFM’s May 2026 — also issued in 2021 — seen in the high 70s over swaps. “The reality is that there are no recent on-the-run non-guaranteed three year bonds, so there was a material price discovery exercise involved,” said the third banker. “We paid what we felt to be appropriate to the outstandings and were able to deliver the issuer an extremely strong result."
He added that for $500m no-grow deals, there need only be “limited oversubscription to engage strong price leverage dynamics, and that was the case here.”
Rarity value
The new bond was understood to be bid at 78bp over swaps in the secondary market on Wednesday morning, 6bp inside the reoffer spread, though the first bookrunner stressed the importance of that bid being in small size.
He said rarity value played a role in attracting the large order book. “The issuer has done heavy marketing, through face-to-face meetings and on the [telephonic] roadshow last week, to make sure that they got the maximum number of investors to have lines open for them," he said. “And looking across the board in the SSA universe, the opportunity to add a product — an IG-rated SSA product — is few and far between. So I think all that played a role.”
During the marketing period, investors had pointed to fair value in the high 80s, in line with where the May 2026s were trading. That feedback gave the leads a “pretty strong feeling of what investors were looking at”, he said.
He also thought starting 2bp back of the issuer's May 2026s offered a “fairly skinny” concession and said some investors had passed on the deal as they thought it would price through fair value. “It’s difficult when you have a comp out there and during the marketing period, investors were pointing towards a starting level that was inside of it,” he said.
“There are not enough data points across the curve [among the Japanese SSAs]," he added. "JFM, which is also non-guaranteed, has an old 2026 trading at 77bp. So if you go by that, like-for-like for a new three year from JBIC, there’s a 25bp [gap]. But then we are not looking at other issuers — we’re looking at this particular issuer. It’s been a challenge.”
