Better times tipped for battered US dollar debt
Jolted by Fed signals for a tapered stimulus, the bond market for Asian G3 issuance has endured a rocky month but traders expect a pickup
Activity in the Asian US dollar bond market is poised to pick up as issuers and investors adjust their expectations in response to the flagged winding down of the United States Federal Reserve's monetary easing programme.
After recovering from the Asian financial crisis of 1997-98, the region's economies expanded rapidly and outperformed many debt-laden developed countries in the West. As a result, some big bond issuers have been able to attain global status instead of an emerging market credit, helping them capture a broader base of investors overseas.
"The most noticeable shift we've seen in the past couple of years is Asian bond issuers' increased access to the US dollar bond market. Some investment grade issuers set benchmarks as global leaders instead of emerging market credits," said Thérèse Esperdy, a co-head of banking at JP Morgan's Asia-Pacific corporate and investment bank, referring to the likes of Samsung Electronics, Baidu and Want Want. These firms raised dollar bonds in the past 12 months at yields comparable to their global peers.
Battered by lingering concerns about the Fed tapering off its monetary easing, funds raised in Asia's debt capital markets denominated in the dollar, euro and Japanese yen - so-called G3 issuance - plunged to US$915 million last month. This is the lowest level since November 2008, when the collapse of US investment bank Lehman Brothers triggered panic as investors rushed to liquidate assets.
The hiccup in the bond market reflects across-the-board pessimism in the region and the growing attraction of US equities, even though sales of G3 bonds rose 17 per cent to US$94 billion in the first half, thanks to strong demand in the first quarter, according to data provider Dealogic.
"We all knew that the US Treasury yields have been at record lows and were going to rise eventually. The impact of that on Asian issuers is similar to that on issuers domiciled elsewhere - they must address the harsh new reality of a higher cost of borrowing," said Esperdy, who headed the US bank's top-ranked global debt capital markets before moving to Hong Kong last year.
On a more positive note, a broad-based rally in global markets at the end of last month followed a downward revision for first-quarter US economic growth, from 2.4 per cent to 1.8 per cent. Investors took heart from the revision as a sign that the winding down of US stimulus would be more gradual.
The relatively sound fundamentals of Asian economies and the generally healthy status of companies' balance sheets have been the key attractions to institutional investors, which include pension funds, insurers, central banks and sovereign wealth funds.
These investors had diversified away from the lower-yielding fixed-income holdings, said Esperdy, who has been in the investment banking industry since late 1980s.
Emerging markets are far less indebted today than developed countries, where growth will remain low for some time to come. "In many cases, global investors have the desire for emerging market exposure, especially in those high-quality creditworthy names," Esperdy said.
Although Esperdy maintains a bullish call on the long-term outlook for the Asian bond market, the veteran banker pointed out that there would be bumps along the way and the market would look for a degree of stability before new issuances returned to the market. "Investors will become more discerning and selective but that is a good sign," she said.
"The bond issuance volume may not break the record high level in the short term but many Asian issuers have a compelling story for investors. The US dollar market offers the deepest liquidity pool and broadest investor base for them."
As higher volatility in global markets reduces capital market activity, JP Morgan has sought to diversity its revenue streams by boosting its offerings of other financial products including foreign exchange, hedging, trade finance and cash management solutions.
Thomas DuCharme, a co-head of banking at JP Morgan's Asia-Pacific corporate and investment bank, said: "Many [chief financial officers] and treasurers are looking for holistic cost-effective solutions to combat margin compression and cost pressure."
According to JP Morgan's estimate, transaction-based banking business represented 20 per cent of the bank's revenue in the region last year, up from 9 per cent in 2010, reflecting the expansion of corporate banking across the region.
"Clients now see us as a wholesale bank with a full suite of investment and corporate banking solutions, particularly strong in cross-border activity," Singapore-based DuCharme said.
He said the volatility in capital markets highlighted the importance of the bank's diversification strategy, easing the bank's reliance on traditional underwriting business. DuCharme cited the healthy level of liquidity in the region's US dollar loan market as an example.