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Asian bond issuers rush to beat the Fed
[SINGAPORE] Asian issuers scrambled to lock in cheap credit this week, rushing out US$5.6 billion of US dollar bonds on the off-chance that the US Federal Open Market Committee would use its monthly meeting to announce its first rate rise since 2006.
India's Reliance Communications had kicked off the week with a US$300m trade on Monday, before China National Offshore Oil Corp followed with a US$3.8bn three-part trade, and then Binhai Investment with US$200m, Bank of India with US$750m and Indonesian developer Jababeka International with a US$70m tap of its existing 2019s. India's Bharat Petroleum rounded things off late on Wednesday.
The FOMC ultimately held the Federal Reserve Rate at 0.25 per cent, unchanged since December 2008, while weak first-quarter data showing US GDP growth of just 0.2 per cent year on year lent support to those who expect the rate to stay lower for longer.
Few economists were expecting the Fed to begin raising rates in April. Bank of America Merrill Lynch had one of the more aggressive forecasts, predicting that the Fed would raise rates in September, December and four times next year. However, six Asian companies thought it prudent to come to the US dollar market while a low-rate environment was still certain.
Bharat Petroleum was the last to cross the line, printing a US$500m 10-year deal under the Reg S-only format on Wednesday, ensuring that it could close the deal in European hours before the FOMC meeting wrapped up. "I'm definitely glad we went when we did," said a bookrunner, who worked on some of the deals. "The markets look fairly soft after that data." Memories of 2013 Notably, three of these issuers were from India, one of the markets that suffered most in the tapering scare of 2013.
In May 2013, when markets first saw signs of an end to US monetary easing, volatility spiked and US 10-year Treasury yields jumped, hitting 2.99 per cent in September from 1.62 per cent. This left emerging markets like India and Indonesia, along with Brazil, South Africa and Turkey, vulnerable as investors fled to perceived safe havens, sending the rupee and rupiah plunging against the dollar.
Analysts believe the two Asian countries are stronger now. "India's vulnerability has declined," wrote Fitch Ratings."A changing policy environment has had a positive impact on its macroeconomic profile." Fitch noted, however, that Indonesia was still vulnerable to external shocks, particularly because falling commodities prices had harmed the country's exports.
HSBC noted that the impact of the 2013 "taper tantrum" had been limited in Asia, with only the yields of the 10-year government bonds of Indonesia and Hong Kong rising more than those of US Treasuries.
Still, it said Malaysia looked more vulnerable today than in 2013, with short-term external debt now at more than 90 per cent of its foreign-exchange reserves, around 20 percentage points from March 2013. "On this measure, Korea and India appear far more robust than in 2013 (and Indonesia somewhat), but Malaysia stands out as being much more vulnerable," HSBC wrote in a research note.
Strong demand If Asian issuers were nervous of a repeat of 2013, investors seemed unconcerned.
CNOOC's three tranches of US dollar bonds attracted combined orders of US$10.7bn. Pricing of all three tranches of five, 10 and 30 years was tightened around 20bp from initial guidance.
Bharat Petroleum pulled in orders of US$2.1bn for its US$500m 10-year bond at 208bp over Treasuries, with a solid 61 per cent going to fund managers. The Reg S-only notes priced only hours ahead of the FOMC's statement on Wednesday.
There was good demand at the shorter end of the curve, too. Bank of India attracted US$3bn of orders for its three-year deal, priced at 185bp over Treasuries in the Reg S-only market.
The FOMC will not meet in May and it is considered highly unlikely that the Fed would raise rates without a meeting. So, issuers will have a clear two-month run to print bonds in the currency without worrying about policy statements affecting Treasury yields.
The Fed indicated at yesterday's meeting that it would not raise rates until it was confident that the labour market was improving and inflation was heading towards 2 per cent.