Uridashi Issuance in H1 2019

So far this year, foreign currency Uridashi issuance has totaled $2.6 bln. The Q1 total was about $2.5 bln and so issuance basically came to a screeching halt in Q2. Annualized, this amounts to $5.2 bln and would be the lowest since the $2.2 bln issued in 2002.EM Uridashi issuance has totaled only $366 mln so far this year. Annualized, this amounts to $732 mln and would be the lowest since the $313 mln issued in 2004. With EM FX getting a bit more traction in late June due to the more dovish Fed message, it will be interesting to see if EM issuance recovers in H2.

As always, we net out JPY-denominated issues 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 $8.4 bln in 2017 (the lowest since $7.5 bln in 2003), before rebounding slightly to $8.9 bln last year.

The share of EM-denominated Uridashi bonds increased steadily from zero in 2003 to 45% in 2012 and 2013. The EM share then fell to 34% in 2014 but recovered to 42% in 2015 and rose even further to a record high 49% in 2017. That makes the sharp drop to 22% in 2018 even more noteworthy. This trend appears to be continuing this year as the EM share has fallen to 14% so far. It remains to be seen whether broad-based positive global sentiment on EM can be sustained this year.

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 30% in 2013. The antipodean share subsequently fluctuated between 30-45% but then fell to an all-time low of 26% in 2018. So far this year, this share has recovered to 33%.

It’s worth noting that it is the US dollar that has crowded out EM. It accounted for a whopping 52% of total non-JPY issuance in 2018, the highest share on record. If the H1 pace is sustained, then the dollar share would rise even further this year to 53% of total non-JPY Uridashi issuance.

 

EM CURRENCY BREAKDOWN

TRY has a 24% share of total EM issuance so far in 2019, down from nearly 40% in 2018. Its average share from 2005-2018 was 16%. Political risk remains an ongoing issue, as does high external vulnerability and elevated inflation. Further monetary tightening seems likely, which may help keep the lira attractive to Japan investors.

BRL has a 15% share of total EM issuance so far in 2019, down from 25% in 2018. Its average share from 2005-2018 was 27%. Brazil short-term interest rates have fallen to record lows, which may hurt the real’s attractiveness. The real could become even less attractive with the possible resumption of the easing cycle in 2019.

ZAR has a 2% share of total EM issuance so far in 2019, down from 3% in 2018. Its average share from 2005-2018 was 34%. The SARB may start an easing cycle soon, which would make the rand even less attractive. Despite Zuma’s ouster, we still see heightened political risk ahead of the May elections.

MXN has an 18% share of total EM issuance so far in 2019, up from 8% in 2018. Its average share from 2005-2018 was 11%. Fundamentals are solid, but the peso has not benefitted much from Banco de Mexico’s tightening cycle. It may embark on an easing cycle later this year, which would dent its attractiveness.

RUB has a 6% share of total EM issuance so far in 2019, up from 2% in 2018.   Its average share from 2005-2018 was 3%. The ruble could get some more traction if oil prices 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 make up 65% of the EM Uridashi issuance so far in 2019. This is the lowest share on record. 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 has changed? Clearly, high yielding ZAR is no longer as attractive to Japan investors as it once was due to deteriorating fundamentals, falling significantly below its long-term average share since 2012. BRL has also seen its share fall significantly below its long-term average this year. Of this main group, TRY and MXN are seeing the biggest positive divergence this year from the long-term averages.

Most significantly, INR continues to get a larger than usual share of total EM issuance. That share has risen to 32% so far in 2019, up from around 20% from 2015-2018 and well above its long-term average of 7% from 2005-2018. It’s also worth noting that IDR had seen its share grow to 5-7% from 2014-2016 vs. the 3% longer-term average from 2005-2018. However, its share fell back to 2% in both 2017 and 2018 before recovering to 4% so far this year.

 

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.