2020 G3 DCM: Bull market stretches the maturity curve

Make hay while the sun shines appears to be the motto for Asia’s international bond markets in 2020 as investment grade issuers and insurance funds see greater value in longer-dated tenors.

How do you top a barnstorming year like 2019? That’s the question that market participants have been asking themselves, this December, as they reflect on a year when Asia ex Japan’s $307 billion-odd G3 issuance volumes broke through 2017 to claim an all-time record.

A cascade of high-performing, high yield deals have fattened investment bankers’ fee pools and helped many investors to achieve their best returns in a decade.

Past experience suggests that this is unlikely to last, although there is no sign of any reversal yet and the first quarter of 2020 is shaping up to be as busy as ever.

As the market winds down towards the end of year FinanceAsia has been canvassing sell-side bankers for their 2020 forecasts across investment grade, high yield, frontier markets, bank capital and green financing. In this article, we present their views on the main global trends driving Asia’s international bond markets and what that means for China’s investment grade borrowers.

The broad brush consensus is that investment grade and high yield spreads will stay tight across the board, not least because issuance volumes are likely to be more muted on the Chinese high yield side after the National Development Reform Commission (NDRC) decided to restrict real estate credits, which drive flow, to refinancing.  Quite a few bankers, however, have joked about the pitfalls of making any issuance forecasts at all given their recent track record (see table 1).

Typical are the comments of Tim Fang, head of global markets at AMTD in Hong Kong. “I think we’re all very hesitant about making predictions given how everyone’s got the following year completely wrong for two years running now,” he said. “But it does feel like 2020 will continue along the same vein as 2019 for now. The markets feel stable.”

This time last year, the outlook of most participants could have hardly been more bearish. “Only a few enlightened souls were ahead of the curve, positioning themselves for this year’s rally,” commented Clifford Lee, global head of fixed income at DBS in Singapore.

This time around, Lee said that issuers, investors and intermediaries are feeling “pretty confident about 2020,” and entering the year on a more “balanced footing” backed by a healthy pipeline.

As Lee also adds, however, the whole market is “aware that it’s a big redemption year coming up especially for high yield.” Nomura calculates this at $224 billion (Asia ex-Japan, ex-Australia) up from $186 billion during 2019, while ANZ puts it at $188 billion.

One of Lee’s main concerns is that the bond market needs to stay open all year, as it has done in 2019, given the inherently higher risk profile this redemption flow will put on the pipeline.

Dilip Shahani, HSBC’s head of global research for Asia Pacific, points out that there will be $12 billion of redemptions in January alone and $44 billion across the whole of the first quarter. He believes that this will create a “powerful technical bid that will drive spread compression and force investors to chase new primary deals at no concessions, if not inside secondary market levels.”

Haitham Ghattas, head of Asia Pacific capital markets at Deutsche Bank, also reflects how issuers were spurred into the bond market by strong spread contraction during 2019. Where 2020 is concerned, he also agrees that it is “unlikely we’ll hit the same volumes again in the Chinese real estate sector given the expectation of more stringent NDRC quotas.”

“But barring any macro shocks we still feel pretty good about the structural growth and strength of Asian capital markets,” he said. “I really do think that the regional bond markets have come of age and are now mature enough to withstand volatility and price risk even in the most difficult of environments.”

Amit Sheopuri, co-head of Asia Pacific debt capital markets at Citi, highlights how Asia outperformed the broader emerging markets this year and sees “that continuing in 2020 given that other parts of the world have some pretty severe issues to contend with.” He also believes that “this will help to keep spreads at historically tight levels.”

Sheopuri forecasts a very busy January thanks to an early Chinese New Year during the final week of January.

So does Kenneth Lee, head of primary bond markets Asia Pacific, Natixis. He also notes that “price levels are looking a bit expensive” but adds that “rates aren’t going anywhere and that will buttress supply.” He concludes that supply and demand will be “pretty balanced”.

Table 1: Asia ex-Japan issuance forecasts 2020

Institution Gross forecast or vs 2019 Department
AMTD 10% to 15% decrease DCM
ANZ $325 billion Credit research
BofA $215 billion ($/€ ex-sovereigns) Credit research
DBS 10% increase DCM
HSBC $210 billion to $255 billion Credit research
JP Morgan $260 billion Credit research
Natixis Flat to slight increase DCM
Morgan Stanley Flat Credit research
Nomura $270 billion Credit research
UBS $362 billion Credit research


And there’s the rub. In some way, issuance trends in Asia are quite binary: when rates and volatility are low, issuance remains high.

How will US Treasury yields move during 2020 and will volatility stay low in the face of a number of well-flagged risk factors that failed to de-rail bond markets during 2019 (see table 2)?

Over the course of the year, 10-year Treasuries narrowed from 2.62% at the beginning of the year to 1.82% on December 13. Likewise, the 30-year came in from 3.02% to 2.25% over the same period as the US Federal Reserve instituted three cuts that almost completely reversed the hikes it had implemented last year

As Derek Armstrong, head of Asia Pacific debt capital markets at Credit Suisse, puts it, “I’ve been in this business for a long time, but I was really quite struck by just how quickly everything turned 180 degrees this year.  

“The collapse in Treasury yields significantly changed investors’ risk appetite,” he continued. “There was an about-turn on tenors, new issue premiums, the types of credits that could access the market – you name it.” 

The unwinding of the yield curve inversion also comforted investors that a US recession may be further off than they were anticipating. This may now be given a further fillip following last Friday’s phase one agreement of a trade deal between the US and China.

Table 2: 10-year US Treasury yield forecasts end-2020

Institution 10-year Treasury yield % end 2020
BofA 1.8
CCBI 2.3
Citi 1.25
Credit Suisse 2.2
Goldman Sachs 2.25
HSBC 1.5
Nomura 2.05
Soc Gen 1.2
UBS 1.5


As HSBC’s Shahani notes in his 2020 Asia credit outlook, however, market participants are “correct to be wary of the potential for renewed tariff hikes until both sides come to a comprehensive trade agreement.”

The consensus view is that the Sino-US battle for geopolitical supremacy is here to stay. “If there’s a material escalation in sanctions, it will be a risk-off scenario,” said Conan Tam, co-head Asia Pacific debt solutions, BofA Securities.

Credit Suisse’s Armstrong concurs. “The situation has been relatively stable for the past few months and the main hope is that it will stay that way,” he commented. “But there will likely be a wobble if tensions escalate again.”

Many wonder what impact the run-up to 2020’s US presidential election will have on the tone of the debate between the two countries. The incumbent, Donald Trump, is pushing for a deal to boost his re-election chances, but he could well ramp up the protectionist rhetoric or action if it looks like it is not going to materialise.

This is one of the key factors underpinning economists’ growth forecasts for both countries. In China the consensus appears to be that GDP growth will fall below 6% to the 5.7% to 5.8% mark. HSBC’s Shahani takes comfort from the fact that major policymakers have “repeatedly signalled that they are prepared to use all policy levers to protect against downside risk.”

But as DBS’s Lee adds: “The consensus view is that economic growth is slowing everywhere and we need to keep a look-out for macro headwinds that weigh on sentiment. It’s one of the reasons why investment grade issuance didn’t grow strongly this year.”

Investment grade issuance has grown by a relatively modest 5% through the year to mid-December as companies hesitated about capex and strengthened their balance sheets. DCM bankers are far more constructive about 2020.

One Asian DCM head predicts 10% to 20% growth in Chinese investment grade issuance. Friday’s phase one agreement could tempt a number to dust off their outbound M&A plans again, prompting more bond issuance.

Morgan Stanley credit strategist, Kelvin Pang, also expects net supply by Asia’s investment grade borrowers to pick up due to an increase in capex from easing trade tensions plus concurrent monetary easing that will underpin growth. He forecasts an $83 billion pick up in gross investment grade supply from the region.

So what does all that mean for spread performance during 2020? Here, there is a divide between those who believe the first half will be better and those who veer towards the second half.

Augusto King, head of debt capital markets at MUFG, says that “talking to clients there’s a feeling that the macro situation could weigh on the market as we move into the second half of the year.”

Nomura’s Asian credit analysts back this up. They advocate overweight positioning for the first half of the year.

UBS, on the other hand, expects “trade tensions and a likely trough in growth in the first half of 2020 will carry spreads wider before tightening in the second half.”

HSBC’s Shahani forecasts renewed appetite for risk-taking once the US presidential election is out of the way. He says significant credit spread compression and capital gains will be kept in check because the “business cycle will fail to really take off and high debt levels will be a constant concern lurking in the background”.

He advocates that market participants be content “to clip coupons, with a tactical bias towards adding risk during bouts of volatility triggered by disappointing data or around geopolitics.”

He believes there is less room for credit spread compression among investment grade paper because market participants are “already positioned in rock-solid issuers” coming into 2020. “Any modest tightening of spreads would be a function of investor confidence in the lower-for-longer mantra about US monetary policy, he concluded.


How will prospective Chinese investment grade borrowers react? BofA Securities’ Tam said that, “we are positive on investment grade issuance and think it will be pretty well spread across the board as borrowers seek to capitalise on the lower interest rate environment.”

One key consideration will be whether to issue offshore or stay onshore, which was cheaper during 2019. Natixis’s Lee says that China’s ongoing liquidity squeeze is starting to narrow the onshore/offshore pricing differential to a range where it’s starting to become more attractive to some companies to think about going offshore again.

“They’re also interested because absolute yields are low,” he added.

One DCM banker from a leading Chinese securities house told FinanceAsia that Chinese borrowers are also starting to hedge more.

“They were quite surprised when the renminbi slid through seven to the dollar, so they’re now erring on the side of caution and buying protection when they issue offshore,” she said, estimating that this is adding about 1.2% to a borrower’s cost of capital.

She and the other bankers that FinanceAsia canvassed agreed that the bigger investment grade issuers remain keen to issue offshore because it does not fall under the government’s debt cap at 40% of net assets and it diversifies their funding sources.


There is a trio of sectors that may stand out next year. Bankers expect to see reasonable issuance from the energy sector and a number mentioned pharma and tech as two potential standouts.

A greater variety of tech issuers would be music to the ears of Asian investors. The mix of net cash balance sheets and outsized growth has always been a winning combination.

A number of the region’s dominant players from the e-commerce and wider internet sector have also publicly listed over the past couple of years. Profitable companies such as Xiaomi and Meituan Dianping are obvious candidates to issue a debut international bond either for strategic reasons or to build up an M&A war chest.

Issuance from the pharma sector would also provide more investment options for investors given the lack of paper to date. Here again, issuance is a natural corollary of recent equity market trends where there have been IPOs for profitable companies like Hansoh Pharmaceutical, Wuxi AppTec and Shenzhen Mindray Bio-Medical over the past couple of years.


One of the most obvious consequences of lower rates for longer will be a more concerted push down the maturity curve for borrowers and investors. The current outlook presents an ideal opportunity for borrowers to lock in extremely long-term funding.

It also helps DCM bankers to compete against their syndicated loan counterparts who can offer pricing about 20bp cheaper at the three- to five-point of the curve according to one to whom FinanceAsia spoke. 

As DBS’s Lee explains: “The loan market is still very competitive against the bond market. Banks are hungry and they’re going to continue lending.

“Duration will be one of the main incentives attracting borrowers into the bond market,” he concluded.

Ernst Grabowski, head of Asia Pacific debt syndicate at Morgan Stanley, agrees that duration will become a bigger trend in 2020.

“Appetite for paper at the long end of the curve is growing in tandem with the belief that rates will remain low for a long time,” he commented. “It’s a view that we share.

“Institutions are keen to maximise spread by extending duration,” he added. “We’re also seeing some shoots of interest from ultra-high net worth investors such as family offices in China.”

Grabowski explained that, in many cases, the addition of a 30-year tranche to a benchmark deal brings a company’s cost of capital below its three-decade average cost of funding with 10-year bonds. “The temptation to extend is there: potentiallyeven beyond 30 years. Life insurers in Asia, and pension funds in the US have substantial appetite in the long end of the curve,” he said.

He highlights PTT’s recent $650 million 3.903% 40-year bond and EDF’s $2 billion 4.5% 50-year bond, which was targeted at Taiwanese insurance funds, as two prime examples of the trend.

Some of Asia's longer-standing players will also remember back to 1996 when Malaysian electricity utility Tenaga kicked off a spate of century bonds after issuing a 7.5% 2096 bond. A few weeks later came a 9% 2096 bond from China and then in 1997, an 8.6% 100-year bond from the Philippines, which in retrospect marked a sign of hubris shortly before the Asian financial crisis.

For China, the ideal opportunity to issue a century bond, however, maybe 2021, the 100-year anniversary of the Communist Party if market conditions are still conducive.

Today, Taiwan’s insurance funds are big buyers of long-dated paper given their ongoing need to invest offshore to match their onshore liabilities. However, MUFG’s King says that other Asian insurance funds are also stepping up their purchases too.

“In the past, Asian investors were always known for their demand at the shorter end of the curve,” he stated. “But that’s just not true any more and we’ve seen a big pick up in demand from South Korea and Japan in recent years.

“Japanese insurers are picky and they tend to like SOEs because they buy into the idea of state support,” he continued. “But they have started to diversify and the Asian bid will be an important component for the longer-dated paper we expect to see coming the market during 2020.”


Another aspect of the Asian bid is its preference for dollar-denominated issuance. But the Chinese government is clearly keen for its borrowers to diversify away from the greenback as part of its goal to supersede the US as the world’s leading superpower.

The Ministry of Finance’s jumbo €4 billion ($4.45 billion) bond in early November was a clear message from the top and bankers say that borrowers are taking it on board.

The relatively long tranches of seven-, 12- and 20-years also suggest that the message was aimed at state-owned enterprises (SOEs) with their policy-driven targets. Private sector companies may still have an issue with the pricing, which is typically about 25bp more expensive in euros due to the lack of the Asian bid according to one banker.

Most bankers expect an uptick in euro issuance during the first and second quarters. Sean McNelis, HSBC’s co-head of Asia Pacific debt capital markets, for one is positive.

“The enthusiastic response to both the Ministry of Finance’s euro and dollar jumbo transactions should open the door for a lot more issuance from Chinese corporates and institutions,” he said.

“Those transactions, importantly, also set useful benchmarks as Chinese SOE issuers look to further diversify their funding strategies in 2020 across both maturities and currencies,” he concluded.

In part two of the outlook series, FinanceAsia will look at the trends that may drive Asia’s high yield bond markets during 2020.




This article has been corrected to accurately reflect Grabowski's opinion   








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