Asia counts cost of Fed's stimulus rollback
Even though tapering has yet to begin, investors are losing no time to exit the region
The prospect of the United States Federal Reserve beginning to wind back its bond-buying programme and close the taps on liquidity is hitting regional funding costs. Asian firms looking to borrow in US dollars are getting hit with rising interest rates and by a mass exit of international investors from emerging markets.
Terence Chia, Credit Suisse's head of debt syndication for Asia-Pacific, said investors took US$870 million out of emerging market bond funds last week, marking the 12th straight week of outflows.
"Since the Fed started talking about tapering in May, it caused a spike in US dollar yields, creating a sell-off in risk assets as investors worried about the impact of higher funding cost for credits globally," Chia said.
Brian Jackson, the global foreign exchange strategist for Coutts, described the fund outflow from emerging markets as "severe". He said Asian markets soaked up cash during the last round of quantitative easing, but the process is going into reverse, as investors redirect cash to the US.
Now that US Treasury yields are going up, investors see US government bonds as attractive compared with riskier Asian securities, he said. "It's all related to the outlook for the Fed policy and US interest rates - we are entering a new environment."
This is affecting Asian issuers' cost of funding.
The yield on 10-year US Treasuries has climbed more than 120 basis points since May, when the Fed first dropped hints it would unwind its quantitative easing scheme, involving money printing and bond purchases at the rate of US$85 billion a month. As a result, issuers of US dollar bonds have seen the main benchmark for funding costs climb by more than 1.2 per cent over the past four months. Meanwhile, as investors exit emerging markets, issuers are being asked to pay an ever-widening spread over that benchmark. An Indonesian sovereign bond issued in July came at almost 2 per cent higher funding cost than a near-identical bond issued in April, Thomson Reuters data shows.
Hong Kong and mainland issuers of US dollar bonds are caught in the same phenomenon - they are also seeing a sharp rise in their cost of capital.
"US Treasury yields at the longer end of the maturity have spiked over 100 basis points since May, which would translate to higher funding costs for issuers," Chia said.
This is reflected in bond issuance volumes, and Thomson Reuters says Asian entities - excluding Japan and Australia - sold US$5.8 billion of bonds since June 1, or a third of the issuance seen in the same period in 2012.
John Wade, head of debt capital markets and syndication, Asia-Pacific, RBS, said the recent turbulence has impacted deal-making.
"Until things calm down we are not going to see a lot of flow," Wade said, who was in India during the recent rupee sell-off. The currency has dropped 17 per cent since the start of May.
Meanwhile, local issuers and investors are on the lookout for a contagion effect. The recent rupee sell-off has been matched by declines in the rupiah (down 10 per cent since May) and the ringgit (down 8 per cent since May). Philippine equities dropped 6 per cent last week, and the Indonesian market fell 9 per cent.
Carl Berrisford, an analyst for UBS CIO Wealth Management, said investors tracking returns in US dollars were nervous about any asset priced in a regional currency, including equities. "Everyone is offloading because you have to take into account Asian currencies," he said.
Jackson said as offshore investors sold local-currency Asian assets, they exchanged the currency back into US dollars, triggering more currency weakness - leading to more selling. "The phenomenon has been feeding on itself in the past few sessions," he said.
A research note from CICC issued on Thursday said "the worst is yet to come" for emerging markets. Hong Kong's main vulnerability lies in a collapse in property prices triggered by rising interest rates, the report said.