Monday, 19 August 2013 00:00
SINGAPORE: Lower coupons and cheaper cross-currency swaps are leading to predictions of more euro-denominated bonds from Asian issuers.
Talk of a reduction to the US Federal Reserve’s quantitative easing programme has pushed the yield on the benchmark five-year US Treasury to 1.53% as of Friday from 0.65% on May 1. Meanwhile, the yield on five-year euro mid-swaps has gone to 1.19% from 0.61%.
At the same time, the cross-currency basis swap from euros to dollars has improved from minus 30bp in late June to around minus 25bp. That means that funding in euros is becoming cheaper for the many Asian issuers that routinely swap back to dollars.
“There is no talk of tapering in Europe, so interest rate volatility should be smaller than in the Treasury market,” said one banker, adding that European funds were less affected by outflows than emerging-market bond funds, which traditionally make up a good part of the investor base of Asian dollar bonds.
Investors withdrew the equivalent of 6% of assets under management in emerging markets hard currency bond funds in June, according to EPFR data. Mutual funds that invest in fixed income in the US saw net outflows of US$65.2bn that month, according to Lipper, much worse than European bond funds, which saw outflows of only 28bn (US$34.4bn).