The Asia ex-Japan G3 bond market saw a substandard first quarter but volumes are likely to rebound to as much as $50 billion in the second quarter as borrowers’ sense of urgency to raise funding heightens amid a rising interest rate environment.
Volumes in the Asia ex-Japan G3 bond market denominated bonds touched $41 billion in the first quarter, 22% lower than 2013’s $50 billion during the same period, according to Dealogic. China and South Korea accounted for a large portion of the deals that came to market in the first three months, accounting for a share of 31.9% and 24.5% respectively.
Market volatility – escalating tensions between Russia and Ukraine, and disappointing economic data from China – in the first quarter affected investor sentiment towards emerging markets and Asia as a whole, and this is likely to persist into second quarter.
“Notwithstanding some lingering questions about the quality of the US recovery, concerns about China and Russia, and little manifestation of demand pull inflation globally, we are sure that taper will continue through the rest of the year, interest rates will rise, flows will be more discriminating,” wrote Taimur Baig, chief economist at Deutsche Bank, in a research note released on March 21.
Portfolio outflows from Emerging Asia accelerated to $3.4 billion in the week ending March 19, from $1.6bn the week before, reversing a moderation in outflows in the previous week. Outflows from Asian bond markets hit $302 million after posting inflows of $114 million in the previous week, according to fund flow data provider EPFR.
But such headwinds shouldn’t stop issuers from accessing debt capital markets because interest rates are likely to start trending up anyway, and majority of the risks have been priced in, say analysts. Morgan Stanley expects 10-year US Treasury yields to touch 3.3% by year-end while Barclays expects it to touch 3.4%.
“Given that interest rates are trending back up, this will prompt some companies to refinance sooner rather than later,” Jon Pratt, Hong Kong-based head of DCM at Barclays, told FinanceAsia. “There has been a sense of complacency in the first quarter, so there’s perhaps a bit more urgency for corporates to accelerate their funding in the second quarter.”
Issuers’ complacent behaviour resurfaced when expectations of an interest rate rise taking place in the first quarter dwindled. Ten-year USTs failed to cross the 3% mark predicted by rate strategists late last year when the Federal Reserve began tapering in December. Currently, the yields are still hovering around 2.75% levels, according to Bloomberg data.
However, the urgency for borrowers to refinance or raise funds early has amplified once again when Federal Reserve chair Janet Yellen roiled markets on March 19 by suggesting rate rises could come around six months after the bond buying programme ends. The US central bank’s tapering is expected to end around November.
Some syndicate bankers expect second-quarter G3 Asia ex-Japan volume to touch close to $50 billion as a result, compared to 2013’s $42 billion during the same period. The majority of the issuance will come from China – notably from state-owned enterprises, banks and policy banks – and Korea, mainly because it is a heavy year for redemptions for the country.
About $21 billion of corporate debt is estimated to be maturing in 2014, which is 60% higher than redemptions in 2013. For financial institutions, $14 billion will be maturing in 2014 and more than $20 billion in each of 2015 and 2016. Also, close to $7 billion of sovereign dollar debt matures this year, more than double the redemption in 2013.
Moreover, bank capital issuance is going to continue, as well as sovereign issuance, with Indonesia, Pakistan and South Korea expected to come, say DCM bankers.
There is no doubt that Asia’s bond market remains open, just as long as new issues come with attractive premiums in order to attract enough demand to build an order book. “I think investors are getting more used to the fundamentals of the market,” said one Hong Kong-based syndicate banker. “They will be more selective in demanding premiums from the credit as a result of higher risk.”