A Bloomberg report said Mizuho Financial Group Inc has been setting its sights on hedge funds as potential buyers of Japanese corporate bonds. The said bonds were said to be trading below their face values after a rally in risky debts failed to reinvigorate distressed assets.

The report said Mizuho had tapped Barclays Plc's Taketoshi Tsuchiya to lead a team that will be targeting hedge funds, which was said to be the first foray for the second-largest underwriter of domestic bonds in Japan. Bank of America Merrill Lynch data showed that the yield premium for BBB-rated Japanese corporate paper on average dropped 56 basis points in the last year to 40 points, down from at a high level of 273 in June 2011 after an earthquake and tsunami had triggered a nuclear incident in the country.

Bloomberg added that the rally failed to extend to some of the worst-hit securities in Japan. The 1.155% notes due 2020 of Tokyo Electric Power Co or Tepco, which was its debt offering prior to the Fukushima plant incident, traded at JPY84.4 when its face value was at JPY100. The report also stated that the biggest investors in Japan base their bond purchases firt on the benchmark Nomura Bond Performance Index, which excludes notes with below A ratings like the ones of Nippon Sheet Glass Co and Sharp Co.

Mizuho Securities Co head of fixed income Yasuhiro Shibata said, "It is a big deal for our clients having to hold on to bonds that they bought at 100 which are now trading under 90. In dealing with such bonds, one avenue there is to expand our global investor network."

Tsuchiya said Japan's latent market for under-par debt could total to as much as JPY2 trillion or $19.5 billion, which is equivalent to 5% of all corporate bonds. He added that investors are being offered in Japan access to Asia's largest debt pool backed with legal structures in cases of debt recovery and bankruptcy happen.

Japan Credit Advisory Co chief investment adviser Nobumasa Mizutani noted, "In many cases, it is a lack of buyers that can cause a fall in bond prices rather than a significant deterioration in creditworthiness. There is an opportunity to get really attractive returns (by distinguishing between the two)."