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Asian bond market sets record; 2014 may be slow

Asia had a record year in 2013 for dollar, euro and yen bond issuance with borrowers scrambling to raise debt and anticipating a rise in global interest rates.

The record volumes came despite volatility in US Treasuries, which serve as benchmarks for pricing these bonds. That volatility, and doubts about the US Federal Reserve’s $85 billion a month bond buying programme, prolonged the deal execution cycle as windows of opportunity opened and shut rapidly.

The volatility however, did not prevent issuance hitting a new high with issuers determined to take advantage of rock-bottom interest rates and investors hungry for rising yields on investments.

Deal volumes rose to a peak of $143.8 billion in 2013, eclipsing the previous high of $133.8 billion last year, with HSBC and Deutsche Bank leading the league tables.

Asia’s debt demand is expected to moderate, with the US central bank’s plan to trim its monthly purchases among the key factors behind the likely pullback.

“It will be difficult for 2014 to register another record year for new issuance,” said Thomas Kwan, Hong Kong-based head of fixed income at Harvest Global Investments, who expects outflows in retail funds to continue in 2014, reversing a trend from early last year.

In the debt capital markets league table standings, HSBC retained the top spot in 2013. Among the key deals was helping the Asian Development Bank raise $2.5 billion through a three-year bond. Deutsche Bank jumped from fourth to second place, helped by such deals as Indonesia’s $1.5 billion sukuk. Coming in third was Citigroup.

One factor that Asia’s debt bankers hope will override the US taper is the need for Asian corporates to repay bonds issued five years ago when bumper volumes of debt were raised. The five-year tenor is the most-preferred debt maturity among Asian issuers.

According to Societe Generale, Asian issuers are faced with a record $43 billion in redemptions next year, which compares with this year’s figure of less than $25 billion. The sustained yield gap between dollar and domestic currency assets would also provide the impetus to new borrowers.

But waning volumes of liquidity and the availability of other funding options lead most in the Asian debt markets to predict a slowdown.

“Overall we see a marginal pullback in supply as the bank-loan market has re-emerged as a highly competitive alternative for issuers,” said Jacob Gearhart, Deutsche Bank’s Singapore-based head of syndicate desk.

Volatility in US Treasuries, with the benchmark 10-year yield swinging between a low of 1.614 per cent in May to more than a two-year high of 3.007 per cent in September, resulted in longer execution time for primary deals in Asian bonds this year.

“We had a lot of investor marketing and assessment of markets. One had to be nimble as windows of opportunity opened and closed quickly. Deal cycles were longer this year,” said Devesh Ashra, Hong Kong-based bond syndicate banker with BofA Merrill Lynch.

But that did not deter a jump in the number of transactions with 286 deals completed in 2013, up from 253 a year ago and boosting the 7.5 per cent volume growth, according to Thomson Reuters data.

Headwinds are swirling, however, as financial markets adjust to lower levels of quantitative easing and the impact this will have on markets across the globe.

“Retail investors will continue to allocate money to fixed income, but our sense is that the trend favours equities and that will definitely have an impact on what bond deals get done in 2014,” Deutsche Bank’s Gearhart said.