Uridashi Issuance in 2015 – H1 Update

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. 

INTRODUCTION

Weekly MOF data shows that Japanese investors turned net sellers of foreign bonds in May and June after a promising start to 2015.  Data for the week ended July 3 showed a sixth straight week of net selling of foreign bonds by Japanese investors.  In total, Japan net purchases of foreign bonds YTD now stand at $9.25 bln, down from around $12 bln for all of 2014.  The rolling 52-week total net foreign bond purchases was $33.6 bln for this latest week, down from nearly $100 bln for the week ended March 27.  Other monthly data from Japan show a similar trend in Q2.

It is worth noting that foreign currency-denominated Uridashi issuance in 2014 was virtually unchanged from 2013, at around $13.5 bln.  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 at $20.8 bln in 2010 before falling the next three years to around $13.5 bln in both 2013 and 2014, which was the lowest annual total since 2007.  So far in 2015, we are on a pace for an annual total of around $11.1 bln for foreign currency Uridashi issuance, which would be the lowest since the $9.1 bln posted in 2007.  The projected EM total for 2015 of $4.9 bln would be the lowest since 2009. 7-6-2015 3-44-43 PM7-6-2015 3-44-52 PM

The share of EM-denominated Uridashi bonds increased steadily from around 3% in 2004 to over 50% in both 2012 and 2013. In 2014, that EM share fell back under 50% to around 41%, the first sub-50% reading and the lowest since 2011. So far in 2015, the EM share has recovered to 44%. The 2004-2013 growth in EM Uridashi issuance really came at the expense of DM stalwarts AUD and NZD. The share of these two currencies of total non-JPY Uridashi issuance peaked at nearly 80% in 2006, but fell steadily to just under 30% in 2013. The antipodean share rebounded back to 41% in 2014, but has fallen back to 34% so far in 2015.7-6-2015 3-46-17 PM

CURRENCY BREAKDOWN

BRL has a 26% share of total EM issuance so far in 2015, down from nearly 50% in 2014 but still quite high.  The BRL share of total EM Uridashi issuance was 28% in 2013 and 26% in 2012.  Its average share from 2005-2014 was 24%.  As Brazil local rates are heading higher in the fight against inflation, BRL has regained some of its prior attractiveness.  Policymakers have also worked to repair the damage to investor sentiment, but the fundamental backdrop has worsened.

MXN has a 5% share of total EM issuance so far in 2015, down from 7% in 2014.  The MXN share of total EM Uridashi issuance was 38% in 2013 vs. 7% in 2012 and only 1% in 2011.  Its average share from 2005-2014 was 11%.  Fundamentals remain solid, but the peso will likely have trouble gaining traction after Banco de Mexico’s easing cycle.  Risk of tightening in 2015 remains very low.

TRY has a 31% share of total EM issuance so far in 2015, same share as in 2014.  The TRY share of total EM Uridashi issuance was 15% in 2013, which was down sharply from 35% in 2012.  Its average share from 2005-2014 was 21%.  While the easing cycle has started (and then paused), still-high rates could help support the lira until fundamentals improve.  We remain hopeful that government officials will refrain from attacking the central bank.

ZAR has a 14% share of total EM issuance so far in 2015, up from 1% in 2014.  The ZAR share of total EM Uridashi issuance was 13% in 2013 and 20% in 2012.  Its average share from 2005-2014 was 39%.  The SARB started a tightening cycle and then paused.  This has made it hard for the rand to gain much traction, especially in light of the poor fundamental outlook.  However, the SARB has signaled a desire to restart the tightening cycle in H2.

RUB has a zero share of total EM issuance so far in 2015, down from 1% in 2014.   It appears that the increasing RUB share of total EM Uridashi issuance has stalled in the wake of Ukraine tensions.  The RUB share was 5% in 2013 and 6% in 2012, while its average share from 2005-2014 was 2%.  The ruble should remain unattractive due to low oil prices as well as the ongoing Ukraine-related sanctions.  The central bank has cut rates aggressively in H1, which could also weigh on the ruble’s attractiveness.

Taken together, these five EM currencies make up 76% of the EM Uridashi issuance so far in 2015, the lowest on record and down from 90% in 2014.  From 2007-2014, these five never accounted for less than 90% of the total EM Uridashi issuance, and were typically more in the 98-99% range.  What changed?

Clearly, high yielding ZAR is no longer as attractive as it once was due to deteriorating fundamentals, falling well below its longer-term average share.  RUB too has suffered.  On the other hand, TRY has seen its popularity rebound despite ongoing political risks.  Brazil has tightened aggressively and has seen demand for BRL-denominated Uridashi bonds return.  Both TRY and BRL shares were above their longer-term averages in 2014 and so far in 2015.  RUB was below its long-term average share in 2014 and so far in 2015, while ZAR has been far below its long-term average since 2011.  MXN has been hurt by having relatively low interest rates, and its share was below its long-term share in 2014 and so far in 2015.

On the other hand, both INR and IDR continue to get greater traction.  INR currently has a 17% share in 2015, while IDR has a 7% share.  Both had relatively low shares of total EM Uridashi issuance in recent years, but both started to rise in 2014.  INR accounted for 3% in 2014, while IDR accounted for 5%.

BACKGROUND

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 that near-zero rates in much of the DM should persist well into 2016, and given relatively high interest rates still in EM, we think that the Japanese flows into EM bonds should continue in the coming months, albeit modestly. While the global backdrop should remain conducive to higher yielding currencies, the looming Fed tightening is already causing disruptions across most financial markets. Offsetting this somewhat are the recent developments in both the Eurozone and Japan, where further QE has been seen and even more action appears likely.