(from my colleagues Dr. Win Thin and Ilan Solot)
With the recent MOF readings finally showing some Japanese money going into foreign bonds on a net basis, we thought it would be interesting to look at recent trends in Uridashi bond issuance.
As always, we net out JPY-denominated issues in order to focus on the foreign currency aspects of the Uridashi market. Foreign currency-denominated issuance peaked around $25.5 bln in 2010 before falling to $19.5 bln in 2011 and $17.7 bln in 2012. So far in 2013, we are on a $16 bln annualized pace of non-JPY issuance for the entire year, which would be the lowest since 2007.
Marketed to retail investors, Uridashi bonds represent a small slice of the FX market, but we believe that the observed trends in this segment can reflect those of the larger Japan investment community as well. Given near-zero rates in much of the DM and relatively high interest rates still in pockets of EM, we think that the Japanese flows into EM will continue this year.
The share of EM-denominated Uridashi bonds has increased steadily from less than 10% in 2006 to 56% in both 2012 and so far in 2013. It is also clear that the growth in EM Uridashi issuance has really come at the expense of DM stalwarts AUD and NZD. The share of these two currencies of total non-JPY Uridashi issuance was nearly 80% in 2006, but has steadily fallen to less than 30% so far in 2013. This shouldn’t be too surprising, since AUD and NZD interest rates currently stand at historic lows after aggressive easing cycles in both.
We note that the flow of Japanese money that is expected from the more aggressive QE program by the BOJ may finally have started to materialize. The weekly Ministry of Finance data show that Japanese investors have been net buyers of foreign bonds for four straight weeks now. The bad news is that this 4-week total of JPY2.9 trln ($29.2 bln) only partially offsets the previous seven straight weeks of net selling that totaled JPY6.05 trln ($60.7 bln).
The MXN share of total EM Uridashi issuance has risen to 40% in 2013 from 7% in 2012 and an average near 6% from 2006-2012. Banco de Mexico’s 50 bp cut in March is widely seen as “one and done” and so the peso’s yield advantage should remain intact. Indeed, we downplay the risk of imminent easing in Mexico. Coupled with strong fundamentals, the peso should continue to outperform within EM and attract further inflows.
The BRL share of total EM Uridashi issuance has fallen to 14% in 2013, down from 45-50% in 2010 and 2011 and well below the 2006-2012 average share of 23%. BRL still retains a fairly big share, but it seems clear that Japan investors have been diversifying away from BRL. With Brazil local rates headed higher as the fight against inflation takes shape, BRL could regain some of its prior attractiveness but policymakers still must repair the damage to investor sentiment.
The ZAR share of total EM Uridashi issuance has fallen to 15% in 2013, down from nearly 20% in 2012 and an average of nearly 44% from 2006-2012. With rates at historically low levels, ongoing social turmoil, a very weak fundamental outlook, and risk of credit downgrades, we believe this shift away from the rand is well-deserved. With planned fiscal tightening likely to hurt growth, we think there may be more pressure on SARB to cut rates from an already low 5% in H2 2013 if growth remains sluggish. This would of course narrow the rand's yield advantage.
The RUB share of total EM Uridashi issuance should continue to rise. So far in 2013, RUB share is nearly 10% vs. 7% in 2012 and an average of 2% from 2006-2012. The ruble outlook has improved near-term due to the recent rise in oil prices. While this rise may not be sustainable, we think the ruble can maintain traction if WTI can stabilize in the $90-100 area.
The TRY share has fallen below 20% this year, down from 35% in 2012 and an average 23% from 2006-2012. Near-term, TRY faces some headwinds from a stagflationary outlook coupled with a widening current account gap, but relatively high rates (that are likely to head higher) could help support the lira until fundamentals improve.
Taken together, these five EM currencies make up 98% of the EM Uridashi issuance so far in 2013. Indeed, since 2006, these five have never accounted for less than 95% of the total EM Uridashi issuance, and are typically more in the 98-99% range. We stand by our belief that fundamentals will matter more in 2013. Clearly, high yielders like HUF, TRY, and ZAR are no longer as attractive as they once were due to deteriorating fundamentals.
With the recent MOF readings finally showing some Japanese money going into foreign bonds on a net basis, we thought it would be interesting to look at recent trends in Uridashi bond issuance.
As always, we net out JPY-denominated issues in order to focus on the foreign currency aspects of the Uridashi market. Foreign currency-denominated issuance peaked around $25.5 bln in 2010 before falling to $19.5 bln in 2011 and $17.7 bln in 2012. So far in 2013, we are on a $16 bln annualized pace of non-JPY issuance for the entire year, which would be the lowest since 2007.
Marketed to retail investors, Uridashi bonds represent a small slice of the FX market, but we believe that the observed trends in this segment can reflect those of the larger Japan investment community as well. Given near-zero rates in much of the DM and relatively high interest rates still in pockets of EM, we think that the Japanese flows into EM will continue this year.
The share of EM-denominated Uridashi bonds has increased steadily from less than 10% in 2006 to 56% in both 2012 and so far in 2013. It is also clear that the growth in EM Uridashi issuance has really come at the expense of DM stalwarts AUD and NZD. The share of these two currencies of total non-JPY Uridashi issuance was nearly 80% in 2006, but has steadily fallen to less than 30% so far in 2013. This shouldn’t be too surprising, since AUD and NZD interest rates currently stand at historic lows after aggressive easing cycles in both.
We note that the flow of Japanese money that is expected from the more aggressive QE program by the BOJ may finally have started to materialize. The weekly Ministry of Finance data show that Japanese investors have been net buyers of foreign bonds for four straight weeks now. The bad news is that this 4-week total of JPY2.9 trln ($29.2 bln) only partially offsets the previous seven straight weeks of net selling that totaled JPY6.05 trln ($60.7 bln).
The MXN share of total EM Uridashi issuance has risen to 40% in 2013 from 7% in 2012 and an average near 6% from 2006-2012. Banco de Mexico’s 50 bp cut in March is widely seen as “one and done” and so the peso’s yield advantage should remain intact. Indeed, we downplay the risk of imminent easing in Mexico. Coupled with strong fundamentals, the peso should continue to outperform within EM and attract further inflows.
The BRL share of total EM Uridashi issuance has fallen to 14% in 2013, down from 45-50% in 2010 and 2011 and well below the 2006-2012 average share of 23%. BRL still retains a fairly big share, but it seems clear that Japan investors have been diversifying away from BRL. With Brazil local rates headed higher as the fight against inflation takes shape, BRL could regain some of its prior attractiveness but policymakers still must repair the damage to investor sentiment.
The ZAR share of total EM Uridashi issuance has fallen to 15% in 2013, down from nearly 20% in 2012 and an average of nearly 44% from 2006-2012. With rates at historically low levels, ongoing social turmoil, a very weak fundamental outlook, and risk of credit downgrades, we believe this shift away from the rand is well-deserved. With planned fiscal tightening likely to hurt growth, we think there may be more pressure on SARB to cut rates from an already low 5% in H2 2013 if growth remains sluggish. This would of course narrow the rand's yield advantage.
The RUB share of total EM Uridashi issuance should continue to rise. So far in 2013, RUB share is nearly 10% vs. 7% in 2012 and an average of 2% from 2006-2012. The ruble outlook has improved near-term due to the recent rise in oil prices. While this rise may not be sustainable, we think the ruble can maintain traction if WTI can stabilize in the $90-100 area.
The TRY share has fallen below 20% this year, down from 35% in 2012 and an average 23% from 2006-2012. Near-term, TRY faces some headwinds from a stagflationary outlook coupled with a widening current account gap, but relatively high rates (that are likely to head higher) could help support the lira until fundamentals improve.
Taken together, these five EM currencies make up 98% of the EM Uridashi issuance so far in 2013. Indeed, since 2006, these five have never accounted for less than 95% of the total EM Uridashi issuance, and are typically more in the 98-99% range. We stand by our belief that fundamentals will matter more in 2013. Clearly, high yielders like HUF, TRY, and ZAR are no longer as attractive as they once were due to deteriorating fundamentals.
Uridashi Bonds: What Mrs Wantanabe is Buying
Reviewed by Marc Chandler
on
August 06, 2013
Rating:
Reviewed by Marc Chandler
on
August 06, 2013
Rating:
