The speed of the recovery in niche bond markets impressed market participants in 2009, as investors that poured cash into them achieved high yields and currency appreciation from the start of the year.
"Just about every market has re-opened," says Stephen Dirou, director at TD Securities in London. "In 2009 dollar weakness inspired the pursuit of niche currencies and investors had an amazing year."
Niche currency investors enjoyed big surges in yields and currency gains, but tightening yields and rallying currencies mean 2010 will not be as exciting for niche markets.
The Russian rouble is a case in point: yields neared 20% early in 2009, after having been 5%-6% 12 months earlier, and have now returned to those historic average levels.
Deals in Turkish lira for the World Bank would offer coupons as high as 19% in 2008 and now they are single digits.
"It is hard to think of a market where yields have not rallied and currencies have not performed," says Dirou. "The worst performers in niche currencies still achieved positive overall returns, which is not something I have seen before."
Investors will need to be patient to make money in niche currencies in 2010. "It will be less enticing for investors," says Dirou. "The steep upward trajectory may mean these are historically expensive levels which could make it difficult to get deals done."
However, there are staple currencies that market participants are sure will continue to perform well into 2010. Brazilian reias and Australian dollars are expected to be the star performers.
The Australian dollar is expected to receive a high level of domestic and international demand in 2010. Australias central bank was one of the first to increase interest rates and is expected to raise them again in 2010, which will further encourage investors, as it will push yields higher.
"Coupons for developed markets are not nearly as high anywhere else," says Dirou. "It will be the hot market this year as it was last year."
He cites one week in November, when there was A$650m of issuance including a A$350m Nestlé deal for which TD Securities had to stop taking orders for as demand was so strong, as proof of the currencys popularity.
Away from the US dollar and euro markets, the Australian dollar was the World Banks most popular currency in 2009, says George Richardson, head of capital markets, and it accounted for nearly half of the supranationals deals.
But the Brazilian real was the darling of 2009 and it looks as though 2010 will be another good year for the currency. "Investors favourite was Brazilian reais, it has been a dream asset for investors," says Dirou. "The positive commodity story provides investors with a lot of comfort."
There were over 50 Eurobond deals issued in 2009 in Brazilian reais. Currency returns were around 34% versus the US dollar, with yields of around 10%.
"We hope to see similar opportunities in 2010 in Brazilian reais," says Jessica Pulay, deputy head of funding at the EBRD. "This has been a record year us in terms of issuance in currencies such as Turkish lira and Brazilian real. A number of factors have driven demand in both sectors, such as continued positive sentiment about the currency and the economy, as well as the attractive coupon levels."
There could also be more diversification into a broader range of currencies in 2010.
Historic low yields
"As international yields remain at historically low levels, investors are broadening their focus to a range of currencies, like Russian roubles, Romanian lei and Turkish lire," says Pulay. "Investors will be undertaking due diligence before investing in a particular currency market, assessing the economic environment and currency prospects ahead of making their asset allocation decisions."
The performance of niche currencies in 2010 will also be dependent on the underlying markets and the relative value for investors.
"Many have rallied recently, but their value depends on the dollar," says Richardson at the World Bank. "So it comes back to how the US economy will fare and how this affects the global economy. While weve seen signs of improvement in the US and global economy recently, we dont know how long this will last, so it is hard to tell how this will affect niche currencies."
Horst Seissinger, KfWs head of funding, says its recent transactions, particularly in Brazilian reias and Indonesian rupiah indicate a positive momentum, which he expects to continue into 2010."Confidence in these currencies is coming back," says Seissinger. "There are positive developments in these regions in terms of the underlying credit risk, the currency and economic development."