There were a turbulent few days this week for the bond market as investors fell over themselves to offload US Treasuries, prompting a huge spike in yields (see table).
But unlike the “taper tantrum”, when then chairman of the US Federal Reserve Ben Bernanke first mentioned in May 2013 the idea of gradually reducing quantitative easing, Asia has reacted very differently to this latest spike in US Treasury yields.
In 2013 Asia experienced huge capital outflows, shutting the region’s bond market for months. This time around, however, investors have refrained from pulling the trigger, with the five year spread of the Markit iTraxx Asia ex-Japan Investment Grade Index anchored at 107bp for the entire week.
“It’s not that Asia is no longer affected by whatever is happening in the US, but I think everyone here has grown up a bit and is not jumping to conclusions too quickly," said one Hong Kong based syndicate banker. "They are waiting to see if the sell-off has any legs.”
Factors closer to home
With investor sentiment in Asia unaffected by the sell-off in the US, supply from the region has been strong. Five issuers raised a combined $3.1bn from May 11 to May 13 alone (see table), and that figure is likely to go even higher, with China Minsheng Bank and Agricultural Bank of China New York set to price their respective offerings on May 14.
“There is still so much money going into new bonds and there’s no pressure to sell," said a Hong Kong based fund manager. "It seems to me that the rate move [in the US] doesn’t have anything fundamental behind it."
That is also the view shared by one high yield trader, who thinks that the reasons behind the recent US sell-off are murky at best. “I’ve stopped reading about US volatility anymore. The impact is limited, as seen by the numbers,” he said.
The trader pointed out that the Asia ex-Japan high yield market, which tends to be more vulnerable in times of volatility, had actually tightened by 0.25 to 0.50 cash points during the wobble.
Instead of wasting time trying to make sense of the US sell-off, which in his eyes had so far been irrelevant to Asia, the trader saw it as more important for market participants to focus on events closer to home, such as the lending and deposit rate cut in China on May 10.
“The onshore rate cuts and recent recovery in oil prices are far more important to the Asian bond market because these are factors that actually affects the fundamentals of issuers,” he said.
Light pipeline
While one head of DCM in Hong Kong is not writing off the possibility of the negativity in the US spilling over to Asia just yet, one thing he is certain of is that the sell-off will not have an impact on the region’s pipeline.
That is because primary issuance was always going to be light going into the summer. Many companies are entering accounting blackout period in June with their existing set of financials due to expire by May 15.
That, coupled with a possible US interest rate hike in September, means companies only have a very narrow window if they are hoping to take advantage of the existing low rate environment by issuing bonds in the third quarter.
“The smart ones have already issued or are looking to do so by this month, which was why it’s been so busy after the Easter holidays,” the head of DCM said. “Even if the US sell-off continues, which I doubt will happen, it’s not really going to affect our pipeline — at least, not for the next one and half months anyway.”