SINGAPORE Asian issuance of bonds denominated in local currency has gone up to their largest in more than a decade as borrowers shy away from expensive U.S. dollar debt and tap cheaper, liquid markets at home.
A total of $2.65 trillion was raised in Asia excluding Japan and Australia by the end of September via 12,075 local currency bond issues, according to data from Refinitiv.
The increase in proceeds from a year earlier and the highest for a year-to-date period in over a decade is reflected by a roughly 10 percent increase in proceeds from a year ago.
47.2 per cent came from government issuers, at $1.25 trillion over 2,057 issues. This was followed by the financials sector, which had 31.2 per cent, or $825.78 billion, from 5,419 issuances.
Local currency markets are more insulated from what is happening on the global front, said Wong Kwok Kuan, managing director and regional head of debt markets at Maybank Investment Banking Group.
The Fed funds target rate has gone above 3 per cent, and the Federal Reserve has hiked interest rates by 300 basis points bps since the beginning of the year. The latest projections show that the rate will increase to 4.25 per cent -- 4.5 per cent by the end of 2022.
Local currency bonds are cheaper to issue than dollar bonds because of the rising rate of rate, particularly as the dollar scales multi-year highs and weakens local currencies.
The rate hikes in Asia have generally been more subdued.
Bank Indonesia raised rates by 75 bps in August, after only beginning to hike in August. The Philippine central bank has increased rates by 225bps since May, and the Bank of Thailand has hiked 25bps twice in August and September.
Andrew Lim, regional head of debt capital markets at Maybank Investment Banking Group, pointed out how the U.S. dollar capital market had also seen periods when it was shut due to the macro volatility that caused corporates to look onshore.
The Indonesian company Mandiri Tunas Finance, a majority owned by Bank Mandiri, raised 376.615 billion rupiah $24.80 million of 5 year bonds at 6.75 per cent in February. It paid 8.6 per cent on 5 year bonds in August 2020.
Yields on the 5 year U.S. Treasuries have gone from 0.4 per cent to about 3.8 per cent in December 2020. Credit bonds are typically priced on spreads over sovereign bonds.
The yield on Asian investment grade corporate dollar bonds is now at 5.8 per cent, up 300 bps this year.
Domestic investors are the main buyers who are looking for opportunities to stay invested at home, and the spurt in local bond issuance has spurred a growing appetite for such bonds.
Edmund Leong, head of group investment banking at the UOB's head of group investment banking, said local currency markets are well supported by domestic institutional investors such as life insurance companies and asset managers.
In August, Gulf Energy Development Public Company Limited issued debentures totalling 35 billion baht $940 million, of which 11 billion baht was distributed to high net worth investors, banks, insurance and securities firms.
The volume and amounts raised from issuances this year are not surprising and reflect steady growth in markets over the past years, according to investors.
From 2020 to 2021, the total amount raised from local currency bonds issued in Asia, including Japan and Australia, increased by nearly 15 per cent and from 2019 to 2020, proceeds were nearly 30 per cent higher.
Issuers are expected to continue tapping domestic markets for refinancing existing debt and other capital requirements even as rates increase.
Leonard Kwan, portfolio manager of T. Rowe Price's dynamic emerging markets bond strategy, said financing costs remain within expectations and palatable.
For the most part, it would still be cheaper to finance domestically, even at current higher rates than external markets.