G3 worries could blow cold on Asian bond market rally

Rising fears of economic stagnation in the US and to a lesser extent Europe could cause international investors to withdraw money from Asia and put it into ultra-safe assets such as US Treasuries, believes Deutsche Bank.

  • 01 Sep 2010
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Increasing systemic concerns from Europe and a sharp deceleration in the US manufacturing sector could be the tipping points that compel investors to pull out of the Asian bond market and back into treasuries, strategists at Deutsche Bank believe.

The view holds an ironic twist as investors have rallied into the emerging markets credit, local currency fixed income and equity markets to avoid exposure to the G3 economies of the US, Europe and Japan, which have offered less attractive returns on the back of lacklustre GDP performance.

However, Deutsche Bank expects that if the outlook for the G3 deteriorates further fear will overcome greed and investors will be forced to sell out of regional instruments and return to the safe haven of US Treasuries and similar risk-averse investments.

It notes that if the US’s manufacturing ISM Report, which measures growth in manufacturing in the country, drops to under 50% and into the mid forties, it could prompt such a re-think among international investors.

The higher the percentage reported by the ISM, the stronger growth is predicted to be, with scores of under 50% generally indicating a contraction among manufacturing industries in the US.

“Previously we held a massive underweight in our HK dollar cash bond portfolio to express a bullish view on the floating Asian currencies,” said Martin Hohensee, strategist at Deutsche Bank in Singapore. “In this rebalancing we are unwinding that completely, reducing long Asian [foreign exchange] exposure in Chinese renminbi, Indonesian rupiah and Singapore dollars.”

The biggest concern for the bank is in the US, where recent data is indicating an unpleasant decline in manufacturing output likely to negatively impact Asian exports which tend to follow the US trend with a high correlation, according to Deutsche Bank data.

“We may be at the cusp of a fairly significant re-pricing for the more cyclically sensitive Asian bond market,” Hohensee said.

  • 01 Sep 2010

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 43,164.35 194 10.13%
2 HSBC 40,229.97 226 9.44%
3 JPMorgan 36,402.14 159 8.54%
4 Deutsche Bank 21,224.19 81 4.98%
5 Standard Chartered Bank 20,072.21 135 4.71%

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Rank Lead Manager Amount $m No of issues Share %
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1 Citi 14,293.97 34 16.58%
2 HSBC 10,846.35 25 12.58%
3 JPMorgan 10,355.07 35 12.01%
4 Bank of America Merrill Lynch 7,392.21 26 8.57%
5 Santander 5,929.79 24 6.88%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 16,133.76 64 12.15%
2 Citi 15,819.65 58 11.91%
3 HSBC 10,505.54 51 7.91%
4 Deutsche Bank 7,951.29 20 5.99%
5 BNP Paribas 7,584.94 21 5.71%

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Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

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1 ING 2,337.91 18 10.19%
2 SG Corporate & Investment Banking 1,801.68 15 7.85%
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4 Commerzbank Group 1,172.97 10 5.11%
5 Bank of America Merrill Lynch 1,155.31 8 5.04%

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1 AXIS Bank 8,338.45 114 22.20%
2 Trust Investment Advisors 3,828.00 101 10.19%
3 ICICI Bank 2,904.77 83 7.73%
4 Standard Chartered Bank 2,702.28 30 7.19%
5 HDFC Bank 2,114.13 58 5.63%