Asia DCM to reopen after FOMC, but fears remain

All eyes were on Fed chairman Janet Yellen this week, as market observers nervously watched the run-up to the September 16-17 meeting to see if the US central bank would raise interest rates for the first time since 2006.

Market observers were evenly split on whether the two-day meeting would result in a rate hike and if so, how much.

The uncertainty meant the Asian primary bond market remained relatively quiet this week, with just one dollar deal per day between September 14-16. The three transactions — Swire Pacific, ICBC and Bank of China-guaranteed China Car Funding Investment — were strong investment grade credits.

Despite the different expectations on the rate move, most people GlobalCapital Asia spoke to this week remained nonchalant about its impact on the Asian bond pipeline.

Syndicate bankers are already busy preparing for a busy next week, and are simply going to take Fed’s announcement in their stride. Bankers told GlobalCapital Asia that many high quality IG names had been sitting on the sidelines for some time, “just waiting to see the Fed drama finish”.

Also helping them aim for next week is the fact that the signs from the secondary market have been encouraging. Five year spreads as shown by the Markit iTraxx Asia ex Japan Investment Grade Index tightened from 135bp to 130bp from September 14-16.

But many are already thinking beyond the announcement on interest rates.

“If the Fed hikes the rate, I expect a significant risk-off mode in EM starting with currency followed by equities and then bonds,” said Kay Van-Petersen, Asia macro strategist at Saxo Capital Markets. He said countries like Malaysia and Indonesia, whose bonds have high exposure to foreign investors, will be most vulnerable if there’s a rate hike, and will even face downgrades.

“Money from EM bonds will most likely flow back to DM, such as into eurozone bonds,” added Van-Petersen. “Considering low yields, capital depreciation and macro phenomena in eurozone , which is most ideal for issuers , I also expect to see more Asian issuers opting for euro than US dollars.”

Another market strategist also warned about a possible huge sell-off in the Asian EM debt capital market.

“For Asia’s EM bonds, it works like a poker game,” he said. “Unlike equities which are constantly trading, bonds are much more illiquid products. They could, for example, go for days without trading. As a result, there’s no telling how much an illiquid bond is actually worth given that price quotes are only relevant to the last trading level.”

For that reason, he said in the face of a large catalyst such as an FOMC rate hike, Asian EM bonds could face a huge sell-off that would spread through the market.

Another Hong Kong-based fund manager reckons volatility will continue, irrespective of what the Fed announcement.

“Everyone is mixed about the Fed, but no matter the outcome, volatility is still going to remain. It’s not just about interest rates because people have to see the bigger picture.

“And that picture involves slower growth in China, problems with currency, stock market volatility, sovereigns being downgraded and fundamentals of many economies weakening. So what the Fed says is important, but it’s not that important.”