Last week the ECB unexpectedly halved its refinancing rate to 0.25%. This sent yields spiralling downwards and investors scrounging for yield. Smart supranationals and agencies will take note and take advantage of their coveted high ratings and make a push into the world of local currency issuance.
Demand for niche currencies, particularly Canadian and Australian dollars has been increasing over the course of the year. But now investors are looking beyond these established currencies and are open to buying paper in emerging market currencies. But the bonds must come from the right issuer.
High net worth retail investors are major players in local currency deals alongside institutional buyers. They focus on absolute yield but they require a strong name to take the leap into local currencies.
The best rated credits, who remove much of the credit risk for investors, leaving them with only the currency risk to worry about, will be in a coveted position and will be able to dictate terms. With a flexible approach to currencies, issuers should be able to snap up funding at cheaper levels than their core benchmark markets.
It’s been a volatile year for emerging market currencies and investors have been wary of taking on the risk. But there are windows of market stability and demand has improved in some of them.
Investors are keen on South African rand-denominated assets. The European Investment Bank and the World Bank have printed heavily oversubscribed taps in the currencies over the past two months. Given the volatility this year, borrowers will have to be ready to pounce when the opportunities come as windows may not stay open for long.
The wisest issuers should start to look beyond established niche currencies and undertake the voyage to emerging market currencies from Africa, Latin America and Eastern Europe.
These may not be markets in which to raise large volumes of funding but they offer opportunities of investor diversification and a cheap cost of funds to those who can tackle them.
