Asia Investment Advisors
  • Home
  • Profile
  • Investment Blog
  • Events and Press
    • Events
    • Press Articles
    • Media Quotes
  • Contact
  • Disclaimer

Asian bonds: Steaming ahead

10/16/2013

2 Comments

 
Over the course of 2013, many factors might have been expected to lead to a slowdown in Asian dollar bond issuance. First of all, interest rates have risen from their lows in 2012, with the yields on 10-year Treasuries higher by over 100bp. While everyone knew that interest rates had to normalize at some point, the rise in yields brought that fear to the front and center of everyone’s thinking. Then, in May, Bernanke raised the possibility of slowly withdrawing the monetary accommodation with his discussion of “tapering.” Third, for the last three weeks, we have tried to grapple with the possibility that the U.S. government may have to cut back on paying for its commitments and expenses if the debt ceiling is not raised by October 17.

In the midst of all this, Asian bond markets have had a great year in terms of new issues. So far this year, by our count, over USD 110bn worth of dollar-denominated bonds have been issued by Asian issuers. Month after month, in terms of issue volumes, 2013 has outpaced 2012 (which itself was a record year).
Click to enlarge
It must be noted that this year’s record volumes are despite the lean period in June to August, when only USD 7bn was issued in the full three months. Although this period is usually a low season, this year’s volume was much below the USD 18bn issued during the same three months last year. 

What accounts for the robust state of this market? Are investors blithely indifferent to the ructions around them?

The first thing to recognize is that much of the new issues are simply replacement for maturing bonds. This becomes clear if we consider the increase in the net market value outstanding at the end of the last few years (see chart below). This year, the market value has risen by USD 30bn – not a bad number, but still a slower pace of growth.
Click to enlarge
The figures nevertheless show that net new money has been available for bond issues, despite the repeated challenges. From the issuers’ point of view, the cost of funding is still attractive. Yields of 2.6% on 10-year Treasuries are still near the multi-decade lows, and the bond spreads are also reasonable although higher than the pre-crisis levels. From the investors’ point of view, Asian dollar bonds still offer a pick-up over comparable US domestic issues, even among investment-grade bonds. 

At this stage, it is fair to say that Asian dollar bonds have become a legitimate, large asset class with a diversified pool of issuers and sufficient liquidity for investors. Asian dollar bonds represent roughly 40% of all emerging market dollar bonds. Even as interest rates continue their upward journey in the medium term, we believe that institutional money would still be actively engaged in this market.
2 Comments
Aninda
10/20/2013 04:47:44 pm

Nice blog, Dilip. Keep 'em coming.

So what drives issuance trends in hard currency? Attractive rate differentials for the issuers? How do you see credit risk playing out, given where you see the eocnomic cycle across the region? If you wanted to be conservative, I suppose you'd be concerned about asset bubbles in north Asia and BOP pressures in south Asia. But if you wanted to be correct... what would drive teh choice between issuing in local versus hard currency?

Reply
Dilip
10/20/2013 05:17:56 pm

Aninda, Thanks for your comment. I see the issuance as primarily a function of financial needs of Asian corporates (for growth, acquisitions, etc.) They are reaching out for dollar issuance since the cost of financing is still pretty low, given where the Treasury yields and spreads are. There is some evidence that average leverage has risen in Asia, although not to alarming levels. The choice for the issuers between hard currency and local currency depends not only on the cost of funds, but also on the size, tenure, and ease of issuing. In general, I think larger companies, which are able to access the USD bonds, will also be large borrowers of bank loans and issuers of local bonds. Let me know if you see differently. Cheers

Reply

Your comment will be posted after it is approved.


Leave a Reply.

    RSS Feed

    Author

    Dilip Parameswaran
    Twitter: @AsianCredit

    Archives

    September 2019
    January 2019
    May 2018
    January 2017
    September 2016
    May 2016
    January 2016
    November 2015
    August 2015
    June 2015
    March 2015
    February 2015
    January 2015
    November 2014
    October 2014
    September 2014
    June 2014
    March 2014
    January 2014
    November 2013
    October 2013

    Categories

    All
    Asia
    Asian Hard Currency Bonds
    Asian Hard Currency Bonds
    Bonds
    Books
    China
    CNH
    Economics
    Equity
    High Yield Bonds
    High Yield Bonds
    India
    Trade
    USA

    Recent Posts

    FeedWind
Powered by Create your own unique website with customizable templates.