Asian bonds at a crossroads

BOX: JAPAN

One of the first pockets of the bond market expected to reopen in 2009 is the samurai market – issues by non-Japanese institutions, denominated in yen and sold only to Japanese investors. This market shut down after Daimler’s bond issue in September, with sentiment tarnished by defaults on samurai issues by Lehman Brothers and Iceland’s Kaupthing Bank, but there are clear signs of it reopening.

Australia is expected to be at the vanguard of this shift. Australian banks have been considering their options after the government there agreed to guarantee term funding for the country’s major lenders, and at least two – Westpac and ANZ – are believed to be preparing Samurai issues.

Deals by foreign issuers in yen and available to all investors, known as euro-yen bonds, never went away in the final quarter volatility last year: both ANZ and Westpac have already been to that market since September, as well as Commonwealth Bank of Australia and the Korean steel-making company Posco. But deals targeting the Japanese investor directly have remained elusive. When they come back, though, there’s good reason to expect them to flourish: Y1,897 billion was raised in 2008 up to September, which was well on the way to being a record year before Lehman’s collapse.

Domestically, Japanese bond issuance has also been sharply down since September, although Japanese government bonds have been in high demand from investors looking for low-risk assets. Spreads on those securities have widened, “giving a positive big surprise to many investors,” says Hisato Oiwa, executive officer and head of capital markets and syndicate at Daiwa SMBC.

Daiwa predicts the yield on the 10-year government bond will move between 1.15 and 1.6% in the first quarter; at the time of writing it stood at around 1.215%. Others feel that bleak economic news will push yields to contract further, with Morgan Stanley predicting just 1% by the end of the 2008 fiscal year on March 31.

WHAT’S HOT AND WHAT’S NOT?

Hot:

• Issues in renminbi enjoy strong support even when they come in considerable size. Chinese investors still have a lot of cash and few obvious alternatives to invest in, with property and equities falling and risky.
• The Indian rupee bond market is coming into its own since the ructions in world markets in September and October; two deals worth more than US$1 billion apiece have already been launched in rupees in 2009.
• Malaysia has demonstrated it can attract not only domestic but foreign issuers to its debt markets. Its practical environment for Islamic finance is becoming more of an asset by the day.
• Signs are that the samurai market is about to re-open, with Australian banks leading the charge
• Dollars are back: big deals for the Philippines and Kexim show the right issuers can access sizeable funding in the greenback again.

Not:

• The Hong Kong dollar market, always an opportunistic venue frequented by financial services borrowers, has been moribund and there is little obvious reason for it to turn around in the short term.
• No issues of note have come out in Indonesian rupiah since August
• Vietnam, touted as the exciting new Asian bond market a year ago, has dried up completely with no issues since May.