All eyes were on Fed chairman Janet Yellen this week, as the talk in the run-up to the March 17-18 meeting was that the central bank would review when interest rates might rise by removing the word “patient” from its guidance.
“The dollar has been going strong over the past couple of months and I think everyone, myself included, was expecting an earlier interest rate hike if they got rid of that word,” said a syndicate banker in Hong Kong. “If that happened, yields could go up, which would hurt primary issuance.”
With a market changing event potentially around the corner, the Asian bond market took a step back and waited for events to unfold. In the secondary market the five year spread shown by the Markit iTraxx Asia ex Japan Investment Grade Index remained unchanged, at 106bp, from March 16-18.
It was the same story on the primary side, with no deals pricing over that period — a far cry from the week before, when five issuers raised a combined $7.75bn.
“We knew something big could happen with the FOMC, which was why we advised some of our clients to pre-empt that and come out last week,” the syndicate banker said.
But what was anticipated as a market changer turned out to be a non-event. The Fed did indeed remove the word, but Yellen said this did not mean it would suddenly be impatient to act.
In conjunction with that, the Fed cut its 2015 GDP growth forecast by 0.3% to 2.3%-2.7% and reduced its inflation forecast to 0.6%-0.8% from 1.0%-1.6%. The predicted hawkish signal on the US economy turned out to be dovish.
“All that talk about an early interest rate hike turned out to be a non-story, which is actually good for the pipeline because we’re still going to be in a low rate environment over the short to medium term,” the syndicate banker said.
The broader market Asian bond market shared that view as dollar bonds in the region traded 5bp tighter across the board on the morning of March 19.
“If you ask me what’s actually changed following FOMC? Nothing, apart from sentiment,” said one head of North Asia DCM.
As a result he expected the pipeline to resume normal service, but not right away, as many Asian corporates are still announcing their earnings.
“Mid to end of March is usually an awkward time for issuance because everyone is in accounting blackout, and even once earnings are released it takes about a week or so for the market to digest,” the regional head said. “We’ll probably see a rush of deals in April because time is ticking and issuers will be trying to take advantage of the low rates.”
Distractions
But while deal flow is expected to recover in April, the regional head of DCM said he also expected more companies to start moving to euros — a trend that is already taking shape thanks to the benefit of even lower yields after the European Central bank started quantitative easing.
Chinese high grade issuers, for example, have raised a combined €3.2bn so far this year, already surpassing the €3.1bn seen in what was a record 2014.
Beijing Infrastructure Investment was the latest to join that trend on March 13, with a €500m 1% 2018 bond that printed at just 95bp over mid-swaps. The final pricing was one of the lowest ever achieved by an Asian issuer.
“It’s not just the yield that is attractive but also the potential for the euro to depreciate further against the dollar, which means issuers could effectively pay less to buy them back,” the DCM head said. One euro was worth to $1.08 on the morning of March 19, and he expected it to drop below $1 soon.
While the flatness of the euro curve might tempt some supply away from dollars, Annisa Lee, flow credit desk head for Asia ex-Japan at Nomura, said that the troubles of the Asia ex-Japan high yield sector would have a larger impact on volumes.
On average, high yield credits have traded up two to three cash points so far this year, although it can vary drastically depending on the country as well as the sector. Chinese property and Indian high yield, for example, are around 75bp and 50bp wider than the start of the year. Indonesian names are almost 100bp tighter.
There is also a huge gap between different ratings, with double B rated credits trading 100bp tighter and single B names about 90bp wider.
“It’s looking more like a high grade year rather than a high yield year,” Lee said. “Investors are trying very hard to avoid credits that could suddenly drop 20 points in one go. I think this will continue because we’re still uncertain whether there could be outflows from emerging markets.”