Apple, UBS tap Taiwan for dollars just as bond party set to cool

[TAIPEI] Taiwan's bond-market party, which has seen the island attract global issuers including Apple Inc and UBS AG to sell US dollar debt, looks to go off the boil.

The island's life insurance companies, which gobbled up more than 80 per cent of the US$25.5 billion of non-local-currency debt issued in the first half, say a rally in the notes is starting to push yields to unattractive levels.

Apple Inc's US$1.4 billion sale of 30-year notes last month went at a 4.15 per cent coupon, while a UBS Group AG unit and DBS Bank Ltd both got around 3.6 per cent this month. That compares with June coupons that ranged between 4 per cent and 5.2 per cent.

"Yields of about 3.6 per cent to 3.7 per cent are no longer attractive," said Shin Kong Life Insurance Co vice president Sunny Hsu, adding that investments must be weighed against foreign-exchange hedging costs and potentially higher-yielding assets like local stocks.

Bonds denominated in US dollars make up 86 per cent of outstanding non-local-currency debt in Taiwan.

A rule change in 2014 allowed Taiwan's nearly US$650 billion in life insurance assets to invest more freely in foreign-currency denominated bonds. This led to a 12-fold increase in yearly issuance in 2014 and a 53 per cent increase in 2015.

That growth in demand may slow in the second half as economic and geopolitical surprises around the world drag on global yields. The Federal Reserve has cut its rate projections twice while central banks in Europe and Japan adopted negative rates and expanded bond-buying programs.

Taiwan has Asia's second-lowest 10-year sovereign yield at 0.66 per cent, just after Japan's minus 0.25 per cent. Switzerland, Germany, Netherlands, Sweden and France also have lower benchmark yields showing the global impact of monetary easing.

In Taiwan, insurance firms may find themselves running up against the constraints of their own funding costs - including guaranteed-rate policies - "of around 3.5 per cent for larger insurers and 4.5 per cent for smaller insurers," Fitch Ratings said in January.

Shin Kong's Mr Hsu said he anticipates evaluating other overseas investments as long-duration corporate-bond coupons fall below 4 per cent.

"When the coupon breaks 4 per cent, insurers might have to debate it a bit," said William Huang, head of greater China sales at Societe Generale.

For now, analysts still predict growth will continue apace. Total issuance for the year may expand 20 per cent to 25 per cent over last year to reach as much as US$42 billion, according to the year's top underwriting firm KGI Securities, with large Taiwanese buyers still demanding the assets.

Fubon Life Insurance Co said it plans to buy as much as US$3 billion in foreign-currency denominated bonds in 2016, the same target as last year. The insurer expects a diverse array of companies will issue debt in Taiwan this year, it said in reply to Bloomberg inquiries.

"Companies worldwide can borrow for cheap at the moment so market growth could be slower," said Alvin Yang, an executive vice president at underwriter KGI.

"But Taiwan's callable, long-duration bond market is unique and serves the diversification goals of issuers."

BLOOMBERG