Investors' search for yield lifts Asian bond market again

Asia ex-Japan US$ debt hits US$26.8b in April, up 7.5% from January's record- breaking US$25b
By
Siow Li Sen
lisen@sph.com.sg @SiowLiSenBT
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BT 20140426 LSBONDS26 1062255

MR GOPALAKRISHNAN
Says capital markets were hit in Q1 by tensions in Crimea, but the activities have picked up though
tensions in Ukraine remain elevated

Singapore

ASIAN bonds are in vogue again as US funds make a beeline for them, brushing aside worries over
emerging markets and China's slowing growth.

Setting the regional bond markets on fire this month were issuances by several state-owned Chinese
companies. Singapore had a slice of the action this week, when a Sinochem unit's maiden Singapore
dollar debt sale was almost 10 times subscribed.

Far East Horizon Ltd made a strong debut on the local bond market on Thursday. The Hong Kong-
listed Chinese financial services company, a unit of China's largest trading firm, attracted $3.8 billion
in orders for its debut issue of $400 million 31/2-year 4.25 per cent bonds.

By allocation, private banks had 52 per cent of the issue, fund managers 24 per cent, life insurers 17
per cent and other banks 7 per cent.

Dealogic data as reported by Finance Asia showed that Asia ex-Japan US dollar-denominated bond
volume hit US$26.8 billion so far in April, 7.5 per cent higher than the last record-breaking monthly
figure of US$25 billion in January.

Investors are searching for yield, shrugging off geopolitical uncertainties.

"During the first quarter of the year, capital markets were hit by tensions in Crimea. Though tensions
remain elevated in Ukraine, capital market activities have picked up," said Neel Gopalakrishnan,
emerging markets bond analyst, Credit Suisse Private Banking and Wealth Management.

Earlier concerns of increased indebtedness caused by slowing economic growth are also fading.
China grew 7.4 per cent in the first quarter of this year, the slowest clip since Q2 2012.

Said Harsh Agarwal, Deutsche Bank's head of Asia Credit Research: "One of the key things that
matters for credit is short-term rates, and as long as interest rates remain low - close to zero in many
countries - investors will be incentivised to buy credit because credit enables them to gain a spread
over the risk-free rate."

"Also, although the fundamentals for Asian companies have deteriorated slightly, I don't expect
default rates to go up, which is generally supportive for credit."

Mr Agarwal noted that while supply was high with new issues continuing to come out, much of this
issuance was to refinance existing debt which does not create additional leverage on companies'
balance sheets.

The majority of the issuance in this latest round is being taken up by investors outside Asia - in the
United States and Europe - which means there is not much additional supply pressure on Asian
investors, he said.

Elaine Ngim, Coutts's head of fixed income in Asia, said US institutional funds were allocating more
into emerging markets, while retail participation in Asia has been extremely small in comparison.

She said: "A few reasons driving this demand include increase in allocation into emerging markets,
confidence in China's state-owned enterprises has not really quite faltered previously and default
scares have been around small weaker corporates.

"This demand also reflects a renewed confidence that any probable defaults could be contained with
no systematic risk."

Mr Gopalakrishnan noted that a review of the allocations of recent jumbo-sized bonds by Chinese
issuers showed that most of the tranches of these bonds (greater than 50 per cent) went to US
investors, which were mainly fund managers and insurance companies.

"These investors take advantage of an opportunity to invest in these investment-grade bonds at
decent yield levels," he said.

On April 2, China Petrochemical Corp issued US$5 billion of bonds in multiple tranches in what was
the largest Asian debt sale in more than a decade. This was followed by China National Offshore Oil
Corporation's US$4 billion issuance this week. This week, Tencent Holdings sold US$2.5 billion in
bonds, the largest tech bond issue from Asia ex-Japan.

As to whether there will be more spillover from the China bond fever to Singapore, Clifford Lee, DBS
head of fixed income, had this to say: "The SGD deal market is always more stable - on the upside as
well as the downside."

"All the same, the SGD bond volumes have been building up well," he said.

Year to date, SGD issuances reached $7.1 billion, up a touch from $6.9 billion in January-April 2012,
according to Thomson Reuters.