The attractiveness of raising and investing in longer tenor funding will persist in 2015 despite the impending US interest rate rise.
Although the US Federal Reserve is expected to increase rates mid-year, buoyed by the improvement in the country's economy, the rise is likely to be moderate.
This in turn provides good support for Asia’s credit markets, making it conducive for both investment grade issuers to tap and for investors to invest in the longer end of the credit curve, syndicate bankers said.
“Asian borrowers will look at extending duration, a theme that will continue through the coming year,” said Devesh Ashra, head of Asia debt syndicate at Bank of America Merrill Lynch, in a media briefing in Hong Kong on December 12. “Given scarcity, top quality issuers will be rewarded.”
The yield on benchmark 10-year Treasury notes is hovering around still-low levels. On Monday, it reached 2.12% after closing at 2.08% on December 12, the lowest since June 2013, according to Bloomberg data.
By the end of 2015, Barclays expects 10-year US Treasury yields to touch 2.8%, which is still relatively subdued compared to predictions made earlier this year when analysts anticipated yields to touch 3% by end-2014.
Morgan Stanley, on the other hand, has two forecasts and expects 10-year USTs to reach either 3% or 2.6%. But even in both cases, longer duration notes of beyond five years are still likely to remain attractive to investors.
According to Morgan Stanley in a recent report, the segment that offers the highest total return based on the assumption that 10-year USTs will be at 3% end-2015 is the six- to eight-year part of the curve, which is expected to average around 1.93%.
On the other hand, if the path of the US Treasuries were to touch 2.6% by the end of 2015 (based on forward rates) then the nine- to 10-year part of the curve provides the highest total return at an average of 2.71% because of the higher carry, added the bank.
“Investors who believe that the path of US interest rates will follow that of the forwards should consider extending duration,” said Viktor Hjort, credit analyst at Morgan Stanley. “But since we expect 10-year US Treasury yields to rise and be a headwind to investment grade returns in 2015, we think that there is better value in the six-to-eight-year part of the curve.”
Expanding the investor base
More Asian investment grade issuers have been extending their credit curves by tapping offerings of tenors beyond 10 years and even up to 30 years spurred by the still-low interest rate environment.
According to Dealogic data, the five- to ten-year duration bucket saw the most issuances year-to-date — a whopping $134.5 billion with 234 deals, which is 19% more than last year.
However, borrowers are also increasingly tapping tenors beyond 10 years. This year’s volumes have doubled from 2013’s to touch $29.4 billion with 63 transactions, according to the data provider.
Asian issuers that have been smart enough to extend the duration curve this year include Republic of Korea, which launched a $1 billion 30-year note in June, Bharti Airtel, which raised a $1 billion 10-year bond in May and Alibaba, which sold a $2.25 billion 10-year and a $700 million offering in November.
Raising bonds of that magnitude — size- and tenor-wise — is notably easier for borrowers that look beyond Asia and Europe’s investor base and delve into the 144A market, which was implemented in order to induce foreign companies to sell securities in the US capital markets, according to debt syndicate bankers.
The low proportion of Asian 144A eligible issuance historically has always represented a demand that issuers could tap into if regional demand were to become constrained, BofA Merrill's Ashra said.
ROK's, for example, was more than four times oversubscribed, while Bharti's was nine times oversubscribed. Both of the bonds were marketed in 144A and Reg S (offshore US) markets.
“Given healthy cash balances and strong support from duration buyers globally, you would have ample demand in the long-end of the curve,” said Ashra.
According to Dealogic data, dollar-, euro- and yen-denominated Reg S-only deals touched $95.3 billion with 204 deals in Asia ex-Japan year-to-date, while Reg S/144A transactions reached $82.6 billion with 84 offerings.
