Its little wonder that the alternative currency bond market has been dysfunctional this year credit and currency risk have combined to make life almost impossible for issuers and investors alike. But as the year approaches the half year mark there are some reasons for hope.
"The whole market is a little bit circumspect," says Paul Eustace, head of the syndicate desk at TD Securities in London. "Alternative currencies have been out of vogue for a while, but I believe the first signs of recovery are here. In the last few weeks investors have started to move further out on the credit curve in benchmark dollars and euros. It will not be long before institutional investors start to look seriously again at a market such as Kangaroos for example."
Australian dollars and Norwegian kroner have attracted a steady flow of international demand. German agency KfW has issued Nkr3.256bn ($496m) of bonds this year, according to data company Dealogic, and government guaranteed Australian banks sold Australian dollar paper into international markets in January.
Its understandable: rates are so low in euros, dollars and sterling that a 6% coupon for a triple-A name is tempting.
The Province of Ontario, which has increased its international funding programme this year from 34% of C$28.7bn ($23m) last year to 35%-50% of C$34.8bn, is looking hard at both these markets."Discussions with Scandinavian investors on a recent roadshow through the region revealed some potential interest in a Province of Ontario Norwegian krone issue which we will look to pursue," says James Devine, the head of funding for Ontario, "and we were interested in KfWs A$150m Kangaroo trade. We are looking at doing one."
He says about 50% would be sold to domestic investors, 25% to European and 25% to Asian central banks. He stressed that none of the non-core currencies is a key part of Ontarios funding strategy.
KfW is similar in its approach. "There are two aspects to diversification," says Horst Seissinger, head of capital markets at KfW in Frankfurt. "To diversify the investor base and to diversify currencies. It is worth diversifying in currencies to broaden the investor base. It was a key element of our strategy and our efforts are being rewarded."
George Richardson, head of capital markets and responsible for alternative currency funding at the World Bank in Washington, agrees. "Alternative currencies have an introductory effect," he says. "The best way to get someone to buy you is to show them a bond in their own currency. Once in their portfolio, theyll follow your credit and be more likely to buy in euros or dollars."
As for more exotic currencies, they may be some time because the paper in secondary markets is too cheap. The retail investors that have kept the Norwegian krone and Australian dollar markets tight for new issues stop short at rand, reais and liras.
"The focus is on a couple of currencies where the basic story is sound," says Holger Kron, head of retail bond trading at Deutsche Bank in Frankfurt. "But all over the basic story is distorted. Secondary paper is still very cheap and until it is absorbed there wont be much issuance."
He added that there will be windows here and there for other high yielding currencies.
"For example, for Hungarian forints a window might open for a day, maybe a couple of days, but no longer than a week. It is still the highest yielding active currency in eastern Europe except for the rouble and there is still a market there. For certain emerging market funds Hungarian forints is potentially a benchmark, and some of them will have to trade to become benchmark neutral when things start to lighten up. But this could be rather a spring thaw than a summer heatwave."
He adds that there is an outside chance that New Zealand dollars and Swedish kronor might join Australian and Norwegian currencies later this year and become attractive for issuers.
The International Monetary Funds assistance in Hungary, Poland and Turkey will support the currencies, but when fund managers want currency exposure they will be more likely to buy it in three month deposits so they can get in and out quickly.
"Each redemption sparks potential demand," says Nicolas Devic, the head of local markets Eurobond trading at Royal Bank of Scotland in London, "but it is unlikely that there will be many new issues as investors still prefer more liquid products to gain exposure."
The European Investment Bank had a TL1bn ($619m) redemption in March, which prompted a TL200m new issue in February. JP Morgan and TD Securities led the deal.
Bankers say investors are rolling over 20% rather than 80% of their currency investments, if that.
"I would have expected a tap of the EIB lira deal by now," says Devic, "but so far nothing has happened."