Asia’s G3 bond markets got off to a better start in January than even the biggest bulls predicted a month ago, but bankers and fund managers warn that it is unlikely to last.
Market participants attribute strong primary market demand and secondary market tightening almost entirely to the US Federal Reserve’s end-of-year decision to become more “data-dependent” and “patient” regarding interest rate hikes. Lower rates keep Asia stronger.
Sean McNelis, HSBC’s co-head of Asia-Pacific debt capital markets, sums up the prevailing optimistic view when he says: “Lower US rate expectations have helped Asian bond markets more than any other region”.
He told FinanceAsia: “The region is always more sensitive to sudden changes in Fed policy. It’s one of the main reasons why issuance and investor receptivity has been stronger in this part of the world so far this year.”
On the surface it does not seem that way where issuance is concerned. Levels are roughly one-third below January 2018’s record-breaking base.
But that drop masks the strength of demand for the deals, which have come. That, in turn, has prompted investment banks to scale new issue premiums right back.
Typical is the experience of China Greentown Holdings.
On January 25, the Ba3/BB- credit amassed a $5.6 billion order book for a $400 million perpetual non-call three-year deal. The offering not only re-opened the market for corporate hybrids, but investors’ enthusiasm also gave the issuer the confidence to fix the coupon at 8.125%, some 50bp tighter than initial guidance around the 8.625% level.
However, debt capital markets bankers have been encouraging issuers to get ahead of a possible about-turn by accessing the market sooner rather than later.
McNelis says issuers also agree. “The market has momentum but not necessarily longer-term conviction," he said. "Both the buy side and sell side are aware that 2019 could still be volatile.
“Having said that, we’re more optimistic than the street. We think 2019 will be stronger than 2018 and we're already seeing that with the types of deals and subscription levels in January.”
Fund managers back up this view.
