Uridashi Issuance in 2015 – Q4 Update

Weekly MOF data shows that Japanese investors have been net buyers of foreign bonds for much of this year.  Data for the week ended October 23 showed a third straight week of net buying of foreign bonds by Japanese investors.  Indeed, after a stretch of selling in May and June, Japan investors have been net buyers for every week in H2 except three.  

In total, Japan purchases of foreign bonds YTD now stand at $63.5 bln, well above the $12 bln bought for all of 2014.  The rolling 52-week total foreign bond purchases stood at $58.5 bln through October 23, up from the low of $21 bln from around mid-year.

Yet so far in 2015, we are on a pace for an annual total of around $9.5 bln for foreign currency Uridashi issuance.  This would be the lowest since the $8.8 bln posted in 2007.  The projected EM total for 2015 of $3.9 bln would be the lowest since the $3.7 bln in 2009.

The weak showing so far this year for foreign currency-denominated Uridashi issuance comes after a 2014 that was virtually unchanged from 2013, at around $12.5 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 around $20 bln in 2010 before falling the next three years to around $13 bln in 20111 and then $12.5 bln in both 2013 and 2014, which in turn were the lowest annual totals since 2007.

Uradishi2 Uradishi3The share of EM-denominated Uridashi bonds increased steadily from around 3% in 2004 to peak at 50% in 2012.  It then fell to 49% in 2013 and then 38% in 2014.  So far in 2015, the EM share has recovered to 41%.  The 2004-2012 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 42% in 2014, but has fallen back to 38% so far in 2015.

CURRENCY BREAKDOWN

TRY has a 33% share of total EM issuance so far in 2015, the same share as in 2014.  The TRY share of total EM Uridashi issuance was 15% in 2013, which was down sharply from 36% in 2012.  Its average share from 2005-2014 was 22%.  While the easing cycle has started (and then paused), still-high rates could help support the lira until fundamentals improve.  Political risk appears to have lessened too.

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 25% in 2013 and 24% in 2012.  Its average share from 2005-2014 was 22%.  As Brazil local rates headed higher in the fight against inflation, BRL appears to have regained some of its prior attractiveness.  Policymakers have also worked to repair the damage to investor sentiment, but more needs to be done as the fundamental backdrop has worsened.

ZAR has a 12% share of total EM issuance so far in 2015, up from 1% in 2014.  The ZAR share of total EM Uridashi issuance was 12% in 2013 and 20% in 2012.  Its average share from 2005-2014 was 40%.  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.

MXN has a 4% share of total EM issuance so far in 2015, down from 8% in 2014.  The MXN share of total EM Uridashi issuance was a whopping 40% in 2013 vs. 8% in 2012 and only 1% in 2011.  Its average share from 2005-2014 was 12%.  Fundamentals remain solid, but the peso has had trouble gaining traction after Banco de Mexico’s easing cycle.  Risk of tightening near-term remains very low.

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-related sanctions.  The RUB share was 5% in 2013 and 6% in 2012, while its average share from 2005-2014 was 2%.  The ruble is likely to remain unattractive due to low oil prices as well as the impact from the ongoing Ukraine-related sanctions.

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 89% in 2014.  From 2007-2013, these five never accounted for less than 94% 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.  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.  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.

On the other hand, TRY has seen its popularity rebound despite ongoing political risks.  Brazil tightened pretty 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.

Lastly, both INR and IDR continue to get greater traction.  INR currently has a 18% share in 2015, while IDR has a 6% share.  Both have had relatively low shares of total EM Uridashi issuance in recent years, but both started to rise in 2014.  INR accounted for 4% in 2014, while IDR accounted for 6%.

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.