Asian borrowers take advantage of record low Treasury yields

US 10-year Treasury yields are at their lowest since January 2009. This is a borrower’s dream, but what’s in it for investors?

Stocks tumbled across the board last week after reports that an economic slowdown in the US was on the cards. In addition, the Federal Reserve auctioned off $24 billion of 10-year US Treasury notes, driving the yield to 2.73%, the lowest it has been since January 2009.

After a two-week wave of mediocre performance for recent issuance, some market participants fear that further bad news could slow down activity and lead to more days of flat trading.

Yet with Treasury yields at such lows, pricing remains a very attractive prospect for borrowers. And, thanks to plentiful liquidity, cheap money has continued to flow into Asia.

The struggling markets in the West have enabled Asia to hold onto its position as a safe haven for corporate bond issuance. While Treasury yields continue to fall, the spread premium offered by Asian credits for both high-grade and high-yield corporate issuers has remained attractive relative to the continued improvement in default rates and strengthened fiscal fundamentals in most Asian countries. 

On August 12, bond risk in Asia rose to a three-week high. The Markit iTraxx index for Asia ex-Japan rose 6bp to 126bp just before the open of Asia’s session on Thursday (Aug 12), which is the highest it has been since mid-July.

Against this backdrop, KWG Property, China Oriental and Filipino corporate Alliance Global all sold high-yield bonds in Asian markets.

“Fundamentals aside, the technical aspects of the current market conditions are supportive of bond valuation as a source of low market volatility that has so far driven risk-adjusted return of Asian bonds,” said Vince Chan, credit strategist with bond brokerage firm, AmiasBerman.

According to Dealogic, there has been $49.6 billion of debt raised from 141 deals already this year. Of these, 40 have been printed since the beginning of July, raising $12.8 billion. This level of capital raising is a reflection of the shaky markets in the US and Europe, which have once again opened a window of opportunity for Asian borrowers.

“Issuers are clearly taking advantage of declining interest rates, especially on the long-end, to secure cheap money and smooth out their maturity profile for financial management purposes,” said Chan.

Issuers looking to price in such a market should consider back-to-basic funding needs, the term structure of interest rates and how they plan to use the proceeds of the sale.

Market specialists say long-term issuers that want to build a track record and use bond financing as a major funding source should price their bonds relevant to the underlying risks offered -- unless they are tapping bond markets as a one-off exercise. 

Opportunists such as Olam International play by a different set of rules, as the Singaporean supply-chain manager demonstrated on August 6 when it sold $250 million of unrated paper. As a debutant to the dollar market, sources close to the deal said the borrower was merely taking advantage of low yields to opportunistically price a one-off, 10-year maturity deal to lock in some long-term funding.

The investors' perspective

With so much liquidity in the market, there are fears that investors might be getting carried away, encouraging weaker issuers to price new bonds at levels that are far more competitive than they could expect in a less favourable backdrop.

But bond investors tend to have a longer-term mindset and follow performance history both during and after pricing.

“Investors are smart enough to identify the real value; looking at bond performance in the secondary market, one should be able to gauge which new issue actually stands out,” said Chan.

“Obviously investors are looking for diversification,” said Paul Au, head of Asia debt syndicate at UBS, noting that Asia offers just that. With such a low-yield environment, it also provides investors the opportunity to buy into a range of asset classes as the current backdrop continues to entice borrowers from both investment grade and high yield to come to market.

And with the markets expected to remain this way until at least the end of the month, expect a continuation of opportunistic borrowers pricing both rated and unrated bonds across asset classes.

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