IFR Asia: Everyone wants to talk about interest rates. What are your expectations for rates this year and how are you positioning yourselves accordingly?
Venkat Rao, HSBC: The direction of interest rates is the most important topic in the minds of market participants, and it is also a topic that’s been dissected to the hilt.
Our chief economist, Steven Major, is very well-known for his “lower for longer” views. His latest rates forecast – as of February 23 2024 - calls for the 10-year US Treasury yield to hit 3% by the end of Q4 2024.
We also expect that the yield curve will no longer be inverted by the end of the year and revert to a normalised shape – where longer duration treasuries will yield higher than shorter duration ones.
The market meanwhile is portending about three or more 25bp cuts.
Monica Hsiao, Triada Capital: I’ve been on the other side of what the street has been thinking since the beginning of this year. Then, it had been looking for between four and six rate cuts – and the market rallied on the back of those views.
I've always thought that was too optimistic, and thought it was more likely to be two or three cuts. It doesn’t make sense to price to perfection, there’s just too much uncertainty ahead.
This year’s data shows that inflation is sticky. So, I don't think the Fed is in any rush to lower rates, and that means I'm in the “higher for longer” camp.
As for the curve, I also think it should normalise – or become less inverted – by the end of the year. But it’s not certain. The curve is struggling between the market wondering about the strength of the economy and what the Fed will prioritise. Is the Fed going to wait until something breaks or will they look to make a pre-emptive cut? Is there a risk that inflation will return by next year if they do cut? That’s why the curve has not yet settled into a normalised shape.
Gary Lau, Moody’s: The key question is when the cuts will begin, and how quickly they will be lowered.
Our view may be closer to Monica than Venkat.
Financial markets are pricing in a 150 basis point cut in Fed rates this year, but our house view is more modest than market expectations.
The Fed is probably in no rush to cut rates. They are trying to avoid cutting the rate too soon and too aggressively – but also by too little, too late. Chairman Jerome Powell has said he wants to be more confident that inflation is receding towards sustainability at the 2% level before cutting rates.
We expect there will be four 25bp rate cuts towards the end of the year, with a Fed funds target of around 4.5% to 4.25%.
Madhur Agarwal, JP Morgan: The interest rate is the biggest driver of bond issuance volumes in Asia, especially as issuers have options for alternate fundraising.
When we started this year, the market was expecting six rate cuts or more, but the inflation data doesn’t support that many rate cuts. Our view as to the number of cuts this year changes as more data is released, so, it’s very difficult to say whether you end up with two, three or four cuts.
JP Morgan’s economists at the start of the year predicted five cuts starting in June and a cut in every meeting thereafter. But the reality will be data dependent. And if inflation does not come down, then the Fed will be in no hurry to ease rates.
So, how do you position yourself? Our advice to issuers is: if you are happy with an absolute level when the markets are good, then go for it. Don't wait for a 25bp or 50bp reduction down the line, because it may not happen. And even if you do see cuts, spreads could widen.
Issuers should be guided by absolute cost.
IFR Asia: How have issuers approached the market?
Madhur Agarwal, JP Morgan: It's mixed. Some issuers are going with the dominant view that interest rates will come down in the second half of the year. They don’t expect spreads will change too much, so they’d rather wait before issuing.
But that outlook has begun to change in recent months.
In January, most people were in the “we’ll just wait” camp, but given the change in rate cut expectations, people are rethinking their strategies.
It’s also worth remembering that for many corporate issuers, US dollar bond issuance is an opportunistic exercise. And their view is that if rates don’t come down, maybe they won’t issue in dollars but rely on the domestic currency markets.
The decision as to whether to issue now or wait is more pressing for issuers that need to come to the market. But many others can afford to wait. Maybe those deals will get pushed out to 2025.
Venkat Rao, HSBC: There is a clear distinction between banks and other floating rate borrowers, and corporates. Corporates are way more sensitive to absolute yields, while floating rate borrowers are happy to print whenever they can – as long as the spreads make sense.
And that's why you've seen such a plethora of FIG issuers coming to market – banks and SSAs, even policy banks or development banks.
They are happy to just take spread when it is attractive. And when absolute yields are higher, they get a better response from the market and investors.
As long as the interest rates are high, this dichotomy will continue to exist.
Corporates are trying to evaluate the internal rate of return of projects they are financing versus absolute yields on bonds. They are gauging how much revenue they can generate and whether it makes sense to borrow at current rates.
But for banks, it's going to be easier to navigate higher interest rates, as long as they can get the right spread.
Monica Hsiao, Triada Capital: On the buy side – well, for hedge funds like us, we look at T spreads and Z spreads to check relative value, but we may also take a view on bonds on an all-in yield basis.
So far this year, I’ve been agnostic as to duration, mainly because I have been hedging duration risk, reflecting my more cautious view about when cuts will take place and the pace at which they’ll happen.
Gary Lau, Moody’s: From a ratings perspective, the high yield market is still not open. No matter how the interest rate is trending in the near term, investors remain risk-averse and it’s not easy for high-yield names to come to market.
Investment grade, high-quality corporates on the other hand have plenty of choice as many of them can achieve lower-cost domestic funding. That’s a trend that is particularly evident in China, where monetary policy has been easing. Many high-grade corporates in China are using the domestic market to fund themselves.
Monica Hsiao, Triada Capital: Korea has been an interesting market, because that's one of the regions where we saw lots of US dollar bond issues throughout last year, despite Asia posting net negative supply in aggregate. That was, in part, due to the swap from US dollars back to Korean won still making commercial sense.
Gary raises an interesting point about looking at domestic currency markets for reference. Borrowers that can access both offshore and onshore markets can dynamically decide where they can get the best financing opportunities. That affects the volume of hard currency issuances.
Gary Lau, Moody’s: Just going back to Korea. There are a lot of Korean corporates with large capex requirements, like EV battery and chip makers, for instance, that will look at overseas markets for funding. Not just for size and tenor, but because the government wants to avoid crowding out in the domestic market. The government is quite supportive of non-financial corporates doing cross-border issuance.
That's why, last year, there was record offshore issuance from Korean corporates. We are talking about close to US$15bn in 2023, versus more like US$6bn–$7bn the year before. While we expect offshore issuance from Korean corporates will trend down a bit in 2024, it will remain above the historical average.
Madhur Agarwal, JP Morgan: One key consideration with Korean issuance volumes looking high last year is that Korea, as a proportion of total issuance from Asia, has increased. Overall volume in Asia in 2021 was US$350bn-plus but last year it was only circa US$125bn. Total issuance volume from Korea has not materially changed – it’s a US$30bn–$40bn market. But as a percentage of Asian volume, it has increased.
As Monica mentioned, the reason for Korean corporates looking offshore is that the US dollar swapped back cost in won is not significantly more expensive than onshore borrowing cost.
What also affected the market was a bit of a liquidity crisis in Korea towards the end of 2022. Money was not readily available, and that drove issuers to find diversified sources of funding. It is in their interest to continue accessing dollar bonds so that they do not have to rely purely on the domestic market.
Venkat Rao, HSBC: A few things to add. The liquidity crisis ran the risk of crowding out borrowers domestically but away from that it’s the capex requirements at large corporates that’s driving offshore issuance. A lot of this capex is actually directed outside of Korea, which reflects a change in Europe and the US policy to onshore supply chains. Korean companies need dollars and euros to finance the capex to set up factories. It’s a newer driver to issuers funding themselves in G3 currencies.
Smaller corporates also face similar motivation, but they might not have the standalone rating, for example, or the ability to issue in foreign markets because their businesses are not so well developed.
They are going to their development banks, and asking for help. That, in turn, is driving up the foreign currency borrowing requirements at the development banks as they may need to finance the smaller corporates that can’t fund themselves offshore.
And then there’s the credit card companies – the Korean consumer finance companies – that would traditionally fund in the ABS market. These companies noticed the lack of supply in the dollar senior unsecured market, which made them look very competitive in funding terms. It drove them to issue there.
So, there are some very nuanced reasons to explain the increased amount of supply from Korea.
It’s a notable phenomenon because there’s been a dearth of supply coming from the rest of Asia.
Korean supply is usually very highly rated, it's well respected, and there’s a long history of issuance in the international markets. Korean borrowers have a good following in the US as well as in Asia. It means they are able to issue larger volumes in dollars and they're happy to print into a strong technical market.
IFR Asia: We recently saw a Korean issuer tap the Formosa market. Do those types of opportunity exist as well?
Venkat Rao, HSBC: Korea is a very highly rated country with a lot of highly rated, strong Single A, Double A issuers. That means multiple investors in various jurisdictions can buy their bonds, and they can buy them in decent size.
Korean borrowers also have a long history of issuing bonds, so a lot of the names already have existing investor credit lines, which makes it easier for investors to buy paper. The banks and credit card companies have a strong following in Taiwan, so it’s easy for these Korean issuers to get a bid there. We also find that some domestic markets – like the Formosa market – due to local technical dynamics, can sometimes offer issuers a slightly better cost of funds than in Reg S dollar bonds.
Issuers get better pricing and investors get the size they want in a format they want. It's a match that works well.
Madhur Agarwal, JP Morgan: Diversification is another reason driving the business. We saw an increase in issuers from Korea in the Formosa market last year. Investors are looking for diversification and Korean issuers are also looking to tap into new investors. So, whether it's the euro market or Formosa market, it provides new avenues for Korean issuers to tap into slightly different pools of liquidity.
Dual-listed issuance, including, say, a normal Singapore or Hong Kong plus Formosa listing allows Taiwanese investors to participate for a higher proportion in some of these Korean issuances, and that also helps the issuers. At times, they also get a pricing advantage because they are tapping into an investor base that would otherwise not participate to the same extent.
IFR Asia: What are the expectations this year for high yield?
Gary Lau, Moody’s: There are high yield refinancing needs. We estimate that, as of the end of January, about US$52bn needs to be refinanced in 2024 and US$48bn in 2025 in both the domestic and offshore dollar bond market. The issue here is that investors remain risk-averse due to the prolonged distress in China’s property market, and property developers represent a good chunk of the region’s high-yield market.
The refinancing challenge is real. And while borrowers would like to raise money, the question is whether investors are receptive to new deals. We’ll probably see a bit of issuance from outside China – maybe from South-East Asia, but again, issuers may have cheaper funding options domestically or in the bank market. It is difficult to say whether the high-yield market is going to reopen.
One point I want to make is that fallen angels, investment grade borrowers that have become speculative grade, have increased in our rated universe, partly due to our action on China’s sovereign rating outlook being revised to negative in last December. The majority of the growth in fallen angels has been in China.
Taking fallen angels into account, then refinancing needs in the high-yield space will increase by another US$26bn in each of 2024 and 2025. But for some of these names, even though they have been downgraded, they are still at a very solid Ba rating level. Access to the funding market, both domestic and offshore, will still be there for some of these names, and if that's the case, we’ll probably see more activity this year in the high-yield universe.
Madhur Agarwal, JP Morgan: We are definitely seeing more activity this year compared to last. If you look at real high-yield issuance last year, say, other than what were more like liability management exercises, our view is that volume was less than US$5bn. Investors did not really have any appetite to take credit risk in the high-yield space. That's already improved a lot this year. We have seen more issuers trying to tap the market or at least sound out investors.
However, investors are still cautious. They need to do proper diligence and get comfortable with the underlying credit risk before investing. We have also seen some issuers who tried in the market but did not print as pricing was not at the right level.
But issuance volume is higher. My personal view is that we should see north of US$10bn in genuine high-yield issuance, which is more than double that of 2023. Nevertheless, historically, it's still a low number.
I expect volume to come predominantly from outside China. The bar for Chinese high yield is still high and BB rated issuers from China are required to pay more than double-digit pricing.
If Chinese issuers have a decent credit profile, then they will get a cheaper cost of funds onshore.
We’ll see more issuance from India. Indonesia could pick up in the second half once things settle post-election, and the third interesting market is the Philippines where we’ve seen two unrated corporate issuers trying to access the market. It’s not a straightforward exercise, but we see more and more Philippine corporates trying to tap the dollar bond market.
Monica Hsiao, Triada Capital: We would welcome a reopening and reinvigoration of the high-yield market in terms of seeing more supply of new issues. But we are sensitive to getting commercially sound terms with better protection – after all we have experienced in the China and Indonesia high yield markets, we hope to see covenants tighten.
Investors are pretty open and receptive to new supply from Asia but will be looking for new issue premia.
We've seen a few prints from the Philippines that were technically tight, relative to the risk reward on fundamentals, but because there's such a chase for yield and need for diversification, some have managed to still trade up despite tight pricing.
The China market for corporate bonds is an entirely different animal. In effect, the high-yield pipeline for the most part has been closed. For a large group of issuers, pricing is almost irrelevant to a lot of investors today because there is no right price if you do not feel you can rely on disclosures. How do you do relative value if you don't have confidence in the borrower?
And I think that's the key. Confidence and trust need to come back to the market.
It's very difficult to do fundamental analysis in China as you really have to believe in the reliability of the numbers in the annual reports and belief in corporate governance. The political environment is also uncertain. So, for a variety of factors, China high-yield is virtually shut. For everything else in IG, it is a matter of covenants and relative pricing.
Aside from China, across South-East Asia, we would like to see bonds from other industries besides the property sector come to market. We've gone through more than a few situations where we had been sounded out on bonds from a new issuer but, because the yield wasn't low enough for the company and the cost of capital was a bit too high for their target, they decided against launching.
That is the paradox: the types of issuers we would welcome to the market, the ones everybody likes, are the very same ones that have the luxury to be picky on price and timing. That dynamic has forced many investors in Asia to look further beyond Asia and broaden their search to global EM.
We've always covered the MENA space, for example, and we've been able to make money in Turkey where there has been a huge rally since the beginning of the year. We look elsewhere because sometimes there’s not enough to choose from in Asia, for diversification, or when we spot event catalyst trades abroad.
IFR Asia: Where are you seeing the best opportunities?
Monica Hsiao, Triada Capital: We look at relative value across jurisdictions and certainly keep an eye on where spreads are in Europe and the US as benchmarks.
We also look at private placements, where we can have a little more say in the structuring of deals and can capture some illiquidity premium. The size of that illiquidity premium is purely subjective, of course, but we do demand sufficient compensation for the illiquidity risk we're taking.
However, we have to be very careful today in the private credit space because there's been so much money raised by buyside funds in private credit that you need to maintain your stance and be very disciplined about what you do because some areas, frankly, are over-banked. It will be interesting to look back on the current private credit vintage in three years’ time. You're only really going to know how this vintage has performed after around three years.
On the public side, we continue to look at South-East Asia and MENA. We've also looked at some select LatAm credits. We will also consider companies based, say, in North America and other developed markets that have operations in emerging markets.
We have been happy to look at subordinated debt of very high-grade issuers. Financials is a very broad hunting ground right now, and there's plenty of supply but, as a consequence, you need to be selective. That said, you do get paid very juicy yields in some cases and, in this environment, I think you can receive good carry on banks and take a fundamental view based on their liquidity, capital buffer, NPL management and net interest margins.
Madhur Agarwal, JP Morgan: Bank capital is definitely an area of interest for investors in terms of yield pick-up.
This market was significantly affected by the Credit Suisse crisis. Investors were really taken aback when the regulators forced Additional Tier 1 bond holders to take a full hit while equity holders got some payout. The concept that equity can get paid in advance of AT1 holders really caught investors by surprise.
That’s led to investors doing a lot of homework, going through the regulations of different jurisdictions, and getting comfortable with the idea that what happened in Switzerland is not necessarily going to be repeated elsewhere.
We see a pick-up in bank capital deals, and investors are getting more comfortable with the risk despite what happened with Credit Suisse. We have seen issuance from Hong Kong, Korea, and Japan.
We have even seen UBS price two AT1 transactions since the Credit Suisse episode and there was significant reduction in yield in the second issuance. Last year UBS raised a non-call five-year capital instrument at a yield of 9.25%. Earlier this year, they issued a non-call seven at 7.75% – a 1.5% reduction and a two-year extension of tenor.
Current pricing is still higher compared to before the Credit Suisse event, but it's tightened a lot since the peak levels.
Venkat Rao, HSBC: The Credit Suisse crisis did have an impact in Asia where a lot of the buyers were private banks. These bank capital structures were primarily marketed to private banking investors in Asia, but a lot of hedge funds and trading accounts were also buyers.
At the onset of the crisis, we saw investors retreat from the market saying: “Okay, we need to relook at this. Some regulatory regimes may be more investor friendly than others. We need to establish a pecking order around the jurisdictions and then we would like to start buying the less risky instruments again.”
They started returning to senior debt first, then T2 and, as they became more comfortable with the product, progressively working their way up to AT1 for the yield premium.
Everybody had a better understanding and appreciation of the risk. They were prepared to delve much deeper into the instruments to understand whether they could be converted to equity or written down.
That resulted in a clear distinction appearing between Asian AT1s versus European AT1s in certain jurisdictions. Swiss AT1s were particularly penalised.
By the end of the year, however, we saw risk premiums reduce and a flurry of AT1s being launched in dollars, and also in some local currencies.
Monica Hsiao, Triada Capital: This goes back to fundamentals: looking at a bank's capitalisation and risk management, and understanding how regulators might manage a similar situation in the future.
Credit Suisse might be a special case. Generally speaking, most banks globally are relatively well-capitalised in comparison to other downcycle periods.
Once the market digested the news of CS, it did so very quickly to see CS as an idiosyncratic case and then it became a chase for yield across all the other bank tiered paper.
The reality is that every bank is a little bit of a black box for even the most seasoned financial analyst. So, it goes back to trust and confidence as to how you value the risk even after you take into account all the typical financial ratios to assess relative value.
IFR Asia: What are the opportunities in private credit?
Madhur Agarwal, JP Morgan: We have a team looking specifically at private credit; it’s definitely an area of focus. It's a trend that’s linked to what Monica mentioned about there being more opportunities in the private credit market, and that’s because high-yield issuers still don’t have easy access to the public markets – especially if they have a bit of “grey” about the transaction or they are not repeat issuers.
Private credit has been able to fill a gap as it can accommodate more structured, bespoke, transactions that meet issuers’ requirements, but also have tighter covenants, amortising structure and a better security package.
Issuers are willing to offer this in a private market because they don't want to set a precedent in a public forum. They feel that doing a public bond with all these bells and whistles runs the risk of it becoming their base case for any future issuance.
The private credit market also brings greater flexibility to issuers in times of volatility – we have seen a number of situations where financing can switch from public to private or from private to public.
If issuers do not get the response they want in the public markets, by making a few tweaks to the deal they are able to get it done in private.
Monica is right, however, in that the private credit space is getting increasingly crowded and, in some situations, you can see pricing pressure – especially in India in the infrastructure space, for example. That's a sector everybody is quite familiar with, where default rates are quite low, and where public bonds trade very tight, and hence we have seen significant pricing compression.
But with growth situations – early-stage companies – there are still a lot of opportunities. It involves doing fundamental credit work as you need to be comfortable with the business model and that the company will survive.
Monica Hsiao, Triada Capital: In Asia, it seems the most sought-after areas in private credit have been India and Australia since the China downturn. And within those regions, if you want hard asset-backed credit papers with double-digit yield – good luck with that – because with many funds chasing for big ticket sizes, it has been difficult for private funds to deploy enough capital in Asia.
If this chase to originate enough private credit opportunities was the case already last year when rates were relatively high, then how is everybody going to be fed this year supposing the Fed does start to cut rates later? There's no shortage of money chasing yields of higher quality deals.
From the allocators’ side, private credit appeals because you don't have to mark to market in the same way. It’s a harder life for those of us that operate primarily in public markets with market transparency and have to mark to market daily. The head-in-the-sand factor also explains why people are chasing private credit in an environment when rates are volatile.
The reality now though is that investor bargaining power is diminishing, so we have to be balanced in appetite when we look at this fervour in the chase for private credit. I know for a fact that there are some deals in the global public bond space where the private guys are also investors because they don't have enough private deals to deploy capital into.
Gary Lau, Moody’s: Private credit has been raising capital at a rapid pace over the last decade. The majority of the activity has been in the US and Europe although we also note transactions in India and other parts of Asia are emerging. Given the lack of transparency and comparatively light regulation, investors and regulators are interested in how we see credit risk evolving in the private credit sector. Certainly, we have a dedicated global team and frequently published research on this growing area. We want to stay ahead of the cure and provide more insights into the risks, opportunities and further development of the private credit market.
IFR Asia: Bank loans are also an option for some borrowers. What is the overall financing market like in Asia right now in terms of dollars and local currencies?
Venkat Rao, HSBC: Let’s break it down into two types of markets.
First would be the ‘open’ local currency markets in Asia: AUD, SGD, CNH, and HKD. By ‘open’, I mean borrowers can issue in these currencies off an EMTN programme, they don't need special approvals. It's just a question of a swap. They can issue a Reg S bond and investors can buy it.
The second would be the local domestic markets where there are limitations as to who can issue, whether they can take the money outside of the country, and so on: Indian rupees, Korean won, Malaysian ringgit, Thai baht, etc.
One of the key reasons why we have had a dearth of dollar issuance from Asia in the last couple of years is that as interest rates went up in US dollars, we did not see commensurate rate hikes in domestic Asian currencies.
Hong Kong dollar is the exception, since it is pegged to the US dollar, but in all other local currencies there was not the same inflationary pressure that required rates to be hiked so extensively.
That opened up a differential between where you could borrow in domestic markets versus what you could issue in dollars. For the last couple of years, depending on which market we're looking at and the structure of the deal, there was as much as a 200bp differential between borrowing in a domestic market and US dollars.
On top of that, domestic banks are very liquid and well capitalised. It all adds up to borrowers having access to large liquidity pools in domestic currencies. While borrowers have the option to borrow at cheaper levels in domestic bond markets, they’ve also been able to go to domestic bank loan market that typically lends at even tighter levels than bonds.
That explains why domestic markets have remained more active and why, for example, we’ve not seen borrowers from India coming in droves to the dollar market. The Indian bond and bank markets have served them well.
An equally interesting dynamic is the cross-pollination of local markets – borrowers not only going to their own domestic market, but issuing in other Asian domestic markets because it's more competitive. Last year, for example, outside of Australian dollars, Australian corporates issued a lot in Hong Kong dollars.
That’s a fair amount of corporate supply that we're not seeing in US dollars. Not even seeing it in US private placements. It’s showing up in other Asian currency markets.
This dynamic can change over time depending on cross currency swaps and the extent of local pricing differentials, but I think this has become a growing theme. Domestic currency issuance, primarily from corporates, is taking potential supply from the US dollar bond market. It’s been a big trend.
It's also driven, to a certain extent, by a regional uncoupling of monetary policy from the US. As US dollar rates went up sharply, for example, even though rates in Singapore and Australian dollars also increase, you have China, which is on a completely different path altogether. China has been easing throughout this last two-year cycle, so China corporate issuance has gone onshore.
There are also questions about certain sectors of the Chinese economy that limits access to dollar markets – high-yield real estate, for example. But even with investment grade issuers, it makes very little commercial sense to borrow in dollars because the cost of financing in CNH or CNY is so much cheaper.
To give some numbers, annual Hong Kong dollar supply from 2021 was roughly about HK$250bn, but last year it was HK$407bn – up over 33% in an environment where we're seeing a 50% reduction in US dollar supply. Similarly, in CNH, we have had two record years of issuance volumes.
Singapore dollar bond issuance has been interesting. The cost of financing for local issuers is actually relatively high, so they have been going to the bank market. There has been a dearth of bond supply in Singapore. But interestingly, that has led to the absolute yield on bank capital in Singapore becoming relatively cheap. So, we’ve seen European borrowers issuing TLAC, Tier 2, and AT1 bonds, tapping into the demand for bank paper from local investors, and swapping back to their home currency. That has become a big trend as well.
There are nuances to each market, but overall, it’s the difference in monetary policy stance versus the Fed that has helped these markets attract greater levels of supply than normal – from both domestic issuers and also from cross-border pollination.
Madhur Agarwal, JP Morgan: Yes, you have to look at the nuances of each market and that makes it interesting for issuers and investors. The USD-CNY interest rate differential is helping CNH issuance.
You see a lot of onshore investors being able to participate in CNH issuance and, given the very low domestic rates in the CNY or RMB market, any yield pick-up they can get from investing in CNH bonds is good for them. This demand enables issuers to price CNH bonds lower than dollar bonds. It's a win-win situation for both issuers and investors.
Singapore dollar bond issuance is being driven by the fact that FIG issuers from Europe can get access to cheaper private banking money. Singapore investors are getting fewer domestic opportunities as banks are so flush with money that they end up lending to the local corporates.
There are nuances in each market that also constrain issuance. The CNH market, for example, is usually a two-to-three-year market – you can't really tap longer tenor financing – and issuance size is normally limited to US$100m–$150m equivalent.
Despite the individual constraints, domestic markets currently provide attractive opportunities for both issuers and investors. That's why we see growth in volumes of issuance in these markets, despite US dollar volumes being significantly lower.
IFR Asia: What are your expectations for issuance volumes this year?
Madhur Agarwal, JP Morgan: My view is issuance volumes out of Asia will be somewhere between US$125bn–$150bn this year. If we see a few rate cuts, then we could end up on the higher side of this range.
Gary Lau, Moody’s: Refinancing needs are there for IG and high yield names, but for high-yield credits it’s a challenge.
Another bright spot for issuance is transition financing. Underlying green capital investment demand is a significant supporting dynamic for more supply. The funding gap is huge.
With increasingly supportive regulatory frameworks around the region, the market for transition financing through sustainable debt instruments will continue to rise. We see this as an opportunity for more bond issuance.
At the end of the day, however, no matter if it’s domestic currency or foreign currency, whether it’s green bonds, blue bonds, or whatever terminology you want to attach to a deal, it will always be credit fundamentals that are key to focus on.
Monica Hsiao, Triada Capital: We expect this year to be another year of seeing net negative US dollar bond supply in Asia, after redemptions and buybacks, etc, which is a positive technical for bond spreads in this region. For all investors in Asia, it really is a case of looking for other ways to diversify in other EM markets, now that the China market has shrunk so much.
To the earlier point about diversifying across regional markets and across currencies, one thing I've noticed is that you see different faces at the table these days. For example, you see many more Chinese asset managers looking at Aussie dollar bonds – people who never thought to look at those types of deals in the past. Everybody has been forced to look at things outside of their regular zone, and that has been interesting. That trend, I suppose, will continue for as long as offshore issuance from China stays small.
Venkat Rao, HSBC: Our research thinks it will be US$130bn–$180bn. It’s a wide range, but it has to be; it’s so hard to predict a precise number as there are a number of factors at play. Where will rates be? What will the domestic economic environment look like?
One of the things we need to bear in mind is elections. There are some important elections this year including in the US. They might have an impact.
There are things that we just don't have a very good handle on.
The things we discuss with issuers that are looking at markets right now is how tight spreads are now, geopolitics and the potential for election noise in the second half of the year.
At least there seems to be some consensus on the direction of rates. But a topic within that consensus would be the reasons for rate cuts. They could be benign or they might not be benign. If they are not benign, for example, you might have rate cuts, but spreads might go up.
In such a scenario, a borrower might end up in a worse issuing environment than right now.
It may not happen and not everybody agrees that is a risk, but let's see how we things develop.
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