Uridashi Issuance in 2018

In 2018, foreign currency Uridashi issuance totaled $9.0 bln. This represents a slight increase from $8.5 bln in 2017 but falls short of the $12 bln issued in 2016.EM Uridashi issuance totaled only $2.1 bln last year. This represents a significant drop from $4.2 bln in 2017 and is the lowest EM issuance since the $1.3 bln total in 2007. Of course, this drop mirrored the global bear trend seen in EM last year. With risk-on sentiment so far in 2019 triggered by a more cautious Fed message, it will be interesting to see if EM issuance recovers.

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 $19 bln in 2010 and fell steadily to $8.5 bln in 2017 (the lowest since $7.5 bln in 2003), before rebounding slightly last year.

 

The share of EM-denominated Uridashi bonds increased steadily from zero in 2003 to 46% in 2012 and 2013. The EM share then fell to 35% in 2014 but recovered to 43% in 2015 and rose even further to a record high 49% in 2017. That makes the sharp drop to 23% in 2018 all the more noteworthy. This potential trend change bears watching in 2019 as it remains to be seen whether the broad-based negative global sentiment on EM in 2018 will return.

The growth in EM Uridashi issuance over the past 10+ years 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 around 31% in 2013. The antipodean share has since fluctuated between 30-45% but then fell to an all-time low of 26% in 2018. Here, it was the US dollar that crowded out EM by accounting for a whopping 51% of total non-JPY issuance in 2018, the highest share on record.

EM CURRENCY BREAKDOWN

TRY had a 41% share of total EM issuance in 2018, up from 30% in 2017. Its average share from 2005-2017 was 15%. Political risk remains an ongoing issue, as does high external vulnerability and elevated inflation. However, Japan investors appear to be overlooking this as the central bank tightened monetary policy aggressively last fall.

BRL had a 26% share of total EM issuance in 2018, up from 16% in 2017. Its average share from 2005-2017 was 27%. Brazil short-term interest rates have fallen to record lows, but do not appear to have hurt the real’s attractiveness. The real should become even more attractive with the likely start of a tightening cycle in 2019, as well as market optimism regarding new President Bolsonaro.

ZAR had a 3% share of total EM issuance in 2018, down from 6% 2017. Its average share from 2005-2017 was 36%. The SARB started the tightening cycle in November, which could help the rand gain some traction. Despite Zuma’s ouster, however, we still see heightened political risk ahead of the spring elections.

MXN had a 7% share of total EM issuance so far in 2018, down from 16% in 2017. Its average share from 2005-2017 was 10%. Fundamentals are solid, but the peso has not benefitted much from Banco de Mexico’s tightening cycle. Political risk remains high until new President AMLO’s policies become clearer.

RUB had a 2% share of total EM issuance so far in 2018, down from 11% in 2017.   Its average share from 2005-2017 was 3%. The ruble could get some more traction if oil prices can recover further. However, sanctions are likely to remain in place and the negative impact on the ruble has not been offset by the central bank’s modest tightening cycle.

Taken together, these five EM currencies made up 79% of the EM Uridashi issuance in 2018. This is up from 75% in 2015 and 2016 (the lowest share on record) and 78% in 2017. From 2005-2013, these five rarely accounted for less than 95% of the total EM Uridashi issuance, and were typically in the 98-99% range.

What changed? Clearly, high yielding ZAR is no longer as attractive to Japanese investors as it once was due to deteriorating fundamentals, falling significantly below its longer-term average share since 2013. Most of the others in this group have seen their shares fall slightly below the long-term averages in recent years. Of this main group, TRY saw the only positive divergence last year from its longer-term average.

Most significantly, INR continues to get a larger than usual share. That share stood at 19% in 2018, down slightly from 20% in 2016 and 2017 but still well above its longer-term average of 5% from 2005-2017. It’s also worth noting that IDR had seen its share grow to 5-6% from 2014-2016 vs. the 3% longer-term average from 2005-2017. However, its share has fallen back below that to 2% in both 2017 and 2018.

 

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 through much of 2019 and perhaps into 2020 and given relatively high interest rates still seen in EM, we think that Japanese flows into EM bonds could resume cautiously in the coming months. While the global backdrop should remain conducive to higher yielding currencies, any renewed intensification of Fed tightening concerns would likely cause more disruptions in the global financial markets.