Following weeks of rocky markets, volatility has calmed following Federal Reserve (Fed) chairman Ben Bernanke’s report to US Congress on Wednesday. This could encourage bond issuers to make use of the funding window that has emerged temporarily.
Bernanke said on July 17 that the Fed’s asset purchases “are by no means on a preset course” and could even be expanded should economic conditions warrant. His concerns about high unemployment and very low inflation emphasised the Fed’s commitment to easy policy settings.
“The implication of what was said is that tapering is not going to happen as quickly as anticipated,” said a Hong Kong-based head of debt capital markets (DCM) to Asiamoney PLUS on July 18. “That’s a positive for bond markets. You’d expect that this would lead to a bit more stability and a better window in terms of what we could see out of Asia.”
Mitul Kotecha, head of foreign exchange strategy at Crédit Agricole agrees: “Fed chairman Bernanke did not deliver anything particular new in his testimony yesterday but still managed to provide further reassurance to markets…bonds liked what they heard, with 10-year Treasury yields dropping below 2.5%.”
Ten-year US Treasury (UST) yields – which surged as high as 2.75% the week of July 8 – reacted positively, touching 2.46% on July 17, the lowest level since July 3, according to Bloomberg. But they had traded back up by three basis points (bp) to 2.49% on July 18 at around noon Hong Kong time.
Additionally, the cost of insuring corporate and sovereign bonds from non-payment in the Asia Pacific region fell, note DCM syndicate bankers. The Markit iTraxx Asia index of 40 investment grade borrowers outside Japan slid 5.5bp to around 136, according to Nomura.
Based on current market conditions, issuers with urgent refinancing needs in the second half of the year should quickly make use of this funding window, highlight market participants.
“Issuers would try to front-load their refinancing requirements, especially if they anticipate higher rates and reduced liquidity in the coming months,” said Ashish Agrawal, director of fixed income research at Credit Suisse. “Unless there are factors that prompt a change in that view, the earlier you refinance the better.”
Also, Agrawal notes that the market has started to price in tapering starting as early as this September and highlights that Credit Suisse predicts that 10-year USTs will reach 2.75% by the end of 2013.
As a result, Bernanke’s good news is unlikely to help markets for long.
“Markets have indeed settled down a bit but we are not out of the woods yet,” said Malcolm Mui, executive director for fixed income syndicate at Nomura. “Currently, markets have become more conducive to new issues and selective names are coming out, but we are not in fully recovery mode yet.”
Market activity returns
But Asian bond markets are starting to see signs of life, note DCM syndicate bankers.
A couple of issuers are in the process of tapping the dollar market with the latest being Indonesian-based ‘B+’-rated retailer, Multipolar which is planning to sell a US$200 million five-year note with initial price guidance in the high 9%.
On July 12, Indonesia sold a US$1 billion 10-year deal at a yield of 5.45%, the highest coupon paid by the sovereign since it sold a US$2 billion 10.15-year note in January 2010 at a 5.875% coupon. On the same day, Japan’s Mitsubishi Corp. closed a US$500 million five-year transaction at an offer price of 99.488.
“After the Bernanke discussions it will be crucial to see how new issues price and perform,” said Mui. “At the moment, we see investors erring on the side of caution and as result, the amount of inflation in recent primary transactions have decreased. We would need to see more deals react positively in secondary markets before the primary market fully reopens.”
Another DCM banker agrees: “Hopefully more road shows will be announced if the market remains stable like this.”
The last few months of emerging market (EM) bond outflows is a sign that investor sentiment is fragile.
EM bond funds suffered outflows of US$956 million in the first week of July, still an improvement from record-high outflows of US$5.6 billion in the final week of June, according to EPFR Global data.