Asian bond market sets record, but demand may slow in 2014

HONG KONG, Dec 23 (Reuters) – 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 U.S.

Treasuries, which serve as benchmarks for pricing these bonds.

That volatility, and doubts about the U.S. 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 U.S.

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

U.S. 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.

VOLATILE TREASURIES

Volatility in U.S. Treasuries, with the benchmark 10-year

yield swinging between a low of 1.614 percent in May to more

than a two-year high of 3.007 percent 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 percent 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.

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Asian bond market sets record, but demand may slow in 2014