Finding a balance

Primary issuance in South-East Asia’s local bond markets has had a slow start this year relative to last year and replicating the record volumes of the past few years will depend largely on policy rate moves.

With interest rates expected to rise in the second half of the year, bankers are predicting a flurry of issuance in the second quarter as issuers seek to lock in lower rates. Bankers are expecting first-half issuance to match or even exceed volumes for the same period last year.

“Issuance will pick up in the first half and numbers will match or be higher than last year, but we are still unsure how the second half will pan out as a lot will depend on rate increases,” said a Jakarta-based banker.

Many bankers echoed the sentiment as pressure mounts of central banks to respond to the growing threat of inflation.

Local bond markets in South-East Asia have grown dramatically over the past few years with central banks keeping policy rates low in the aftermath of the global financial crisis. While this helped the region’s economies to keep growing in the face of a global slowdown, the easy money environment is now stoking inflation, making it almost certain that rates will rise.

“The current inflation rate is still much lower than the 10Y average of 7.2%, but we expect it to rise moderately in the coming months amid strong domestic demand conditions, strengthening global growth and improving global financial market conditions,” Singapore’s DBS said in a recent note on Indonesia.

Indonesian primary volumes in first two months of this year stood at about US$985m, as opposed to well over US$1bn in the same period last year, according to Thomson Reuters data.

“We have seen a lot of supply from finance companies and we are full on the books. We want to see more paper from other companies,” said a Jakarta-based fund manager.

As finance companies have been a major source of primary supply in Indonesia over the past few years, bankers do not see many of them tapping the market this year with investors seeking higher returns on these names. This time, bankers expect a mix of issuers.

Malaysia is the only South-East Asian country with volumes up on last year. This is because issuers are rushing to market to get their financings done before the forthcoming general election, which must be called before the end of April.

Malaysian local currency bond issuance stands at US$4bn year to date, versus US$2.95bn in the same period last year.

Another issuance flurry is expected once the election uncertainty is over as issuers hurry to market before expected higher inflation takes hold in the second half of the year.

However, as investors are also mindful that interest rates will likely rise, they have already started asking for higher returns. “Investors are getting smart. They are asking shorter tenors or step up structures as they anticipate rate hikes,” said a banker in Manila.

In the fist two months of this year, there has just been one deal in Philippines – GT Corp’s US$240m issue. The volume in the same period last year was US$560m.

Along with the possibility of higher rates, the Filipino market is adjusting to new withholding tax rules.

Earlier, if retail investors bought corporate bonds through a bank’s trust department, where it had to be kept for at least five years, the account was exempt from withholding tax. Now, however, trust accounts must pay 20% withholding tax.

“We are seeing issuers pre-paying corporate notes now. So, we expect a lot of issuers to come with corporate notes in the next month or so,” the banker said.

Elsewhere in the region, a sharp drop in Singapore-dollar benchmark rate is making bond yields more attractive for issuers in the city state, but investors’ higher expectations are keeping new supply at bay.

Singapore-dollar SOR rate has retreated from a sharp rise at the end of January. The 10-year rate rose 7bp to 1.99% on January 31 alone. The volatility of US Treasuries is behind some of the movement in Singapore’s benchmark rate.

While rates are lower, volatility and investor pushback have forced some prospective borrowers to postpone new issues until the related market stabilises.

“Issuers are so used to the tight levels obtained last year that they are reluctant to adjust to the higher prices investors now demand,” said one debt syndicate banker in Singapore.

Singapore dollar volume stands at US$2.7bn so far this year, versus US$3.7bn in the same period last year, Thomson Reuters data shows.

Inflationary pressure in Thailand is still benign and core inflation was just 1.57% in February, well within the Thai central bank’s 0.5%–3.0% target range.

However, the huge response to the Ministry of Finance’s 15-year CPI-linked bonds shows that investors are still betting on higher inflation. The Bt40bn (US$1.34bn) issue drew a Bt120bn in demand from 107 accounts.

Clearly, most issuers would rather raise money now than face higher rates and bankers said a pipeline was slowly building on top of the deals of US$1.7bn already printed this year, versus US$2.8bn in the same period last year.

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