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.
Everyone is offloading [as] you have to take into account Asian currencies
"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.