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Monday, 22 April 2019

Debt Capital Markets: Reaching new heights

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Workers climb up a newly installed high voltage electricity pylon in Chuzhou, Anhui province.

Debt Capital Markets: Reaching new heights

Source: REUTERS

Workers climb up a newly installed high voltage electricity pylon in Chuzhou, Anhui province.

Asia’s debt capital markets are enjoying another record year. Excluding Japan and Australasia, total G3 bond issuance up to mid-June had passed the US$100bn mark, according to Thomson Reuters data, putting Asia on track for a full-year total of US$200bn.

After a nervy second half of 2013, fears of a tapering-fuelled slump have proven unfounded, and market conditions are again buoyant. How long that lasts, of course, is the US$200bn question.

Interest rates in the US are not expected to go up until at least 2015, but they have to rise eventually. Europe and Japan will one day need to end their easy-money policies, too, and any number of simmering geopolitical flashpoints could easily boil over.

Even if disaster lurks around the next corner, however, there are many reasons to be confident that Asia’s emerging debt markets can continue to grow.

For one, there is life beyond the G3 currencies. While Asian companies have been taking advantage of cheap funding costs in US dollars, euros and yen, the region’s own currency markets are also developing rapidly. Thailand, for instance, was home to South-East Asia’s busiest local bond market in 2013, meaning its companies are far less reliant on overseas credit than they were before the 1998 Asian financial crisis.

The renminbi is on track to become one of the world’s most important funding currencies, further reducing the impact of higher US dollar rates. With China liberalising its currency, the renminbi’s role in international trade and finance can only grow.

In the international markets, Asian credit has long passed the tipping point that will ensure its recent growth is more than temporary. After consecutive years of record overseas issuance, Asian bonds have reached a critical mass, with the flow of refinancing alone enough to keep arrangers and investors busy for years to come.

There will, of course, be bumps along the way. Near-term concerns are beginning to loom large, as fund managers debate when to call the top of the cycle. The iTraxx Asian Investment-Grade CDS index in June broke through its May 2013 floor, having screamed in from 149bp at the end of January to 97.5bp – the tightest quote since 2010. In absolute terms, the JP Morgan Asian Credit Index has gained 5.7% this year, and is showing an average spread over Treasuries that is at its lowest in at least three years.

The return of corporate hybrids, too, suggests that the stars have aligned in favour of Asian issuers. So far this year, Asian companies have launched 12 perpetual bonds in the international debt markets, most recently with three deals coming in seven days.

That may not immediately count as a glut amid today’s record volumes, but consider that this year’s perpetual issues are now running at a faster clip than last year, despite a 100bp-plus shift upwards in US Treasury rates, and the trend seems even more remarkable.

A US$200bn annual tally will put international bonds from Asia up another 27% on last year’s record. Of course, for that to happen, the stars need to stay aligned for a little longer.

To see the digital version of this report, please click here.

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