Uridashi Issuance in 2015

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In 2015, the annual total was $9.4 bln for foreign currency Uridashi issuance. This was the lowest since the $8.6 bln issued in 2007. The EM total for 2015 was $4.3 bln, the lowest since the $3.4 bln issued in 2009. As always, we net out JPY-denominated issues in order to focus on the foreign currency aspects of the Uridashi market.

The weak $9.4 bln in 2015 for total foreign currency-denominated Uridashi issuance comes after a 2014 that was virtually unchanged from 2012 and 2013, at around $12 bln. Foreign currency-denominated issuance peaked at around $18.5 bln in 2010 before falling the next several years to around $14 bln in 2011 and then $12 bln from 2013-2015. Those years in turn were the lowest annual totals since 2007.

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The share of EM-denominated Uridashi bonds increased steadily from around 3% in 2004 to peak at around 50% in 2012. It then fell to 47% in 2013 and then 38% in 2014. In 2015, the EM share recovered to 46%. 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 fell back to 34% in 2015.

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EM CURRENCY BREAKDOWN

TRY had a 31% share of total EM issuance in 2015, down slightly from 33% in 2014. Its average share from 2005-2014 was 23%. We think the easing cycle has ended, and will likely be replaced by a tightening cycle in 2016. If so, higher rates could help support the lira until fundamentals improve. Political risk appears to have lessened too.

BRL had a 32% share of total EM issuance in 2015, down from 46% in 2014 but still quite high. Its average share from 2005-2014 was 22%. Brazil local rates need to head higher in the fight against inflation in order to help maintain BRL attractiveness. Policymakers have also tried to repair the damage to investor sentiment, but more needs to be done as the fundamental backdrop has worsened.

ZAR had a 10% share of total EM issuance in 2015, up from 1% in 2014 but still quite low. Its average share from 2005-2014 was 38%. The SARB has restarted its tightening cycle. However, heightened political risk has made it hard for the rand to gain much traction, especially in light of the poor fundamental outlook.

MXN had a 3% share of total EM issuance in 2015, down from 8% in 2014. Its average share from 2005-2014 was 12%. Fundamentals remain solid, but the peso has had trouble gaining traction despite the start last month of Banco de Mexico’s tightening cycle.

RUB had a zero share of total EM issuance in 2015, down from 1% in 2014. 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 made up 76% of the EM Uridashi issuance in 2015, the lowest share on record and down from 89% in 2014. From 2007-2013, these five never accounted for less than 93% 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 below its longer-term average share since 2010. MXN has been hurt by having relatively low interest rates, and its share has fallen well below its long-term share in 2015. RUB was also below its long-term average share in 2015.

On the other hand, TRY has seen its popularity rebound despite ongoing political and economic 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 2015.

Lastly, both INR and IDR continue to get greater traction. INR had an 18% share in 2015, while IDR had a 4% 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.