Through Q3 2017, foreign currency Uridashi issuance totaled $7.6 bln. If this pace is sustained, the full year total of $10.1 bln would represent a drop from $13.2 bln in 2016 and would equal the low $10.1 bln in 2015.
SUMMARY THROUGH Q3 2017
EM Uridashi issuance totaled $3.9 bln through Q3. If sustained, the full year total of $5.2 bln would represent a drop from $6.5 bln in 2016. However, it would still be higher than the EM issuance of $4.6 bln in 2015 and $5.1 bln in 2014.
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 $21 bln in 2010 before falling to around $16 bln in 2011, $13.5 bln in 2012, and $12 bln in 2013.
The share of EM-denominated Uridashi bonds increased steadily from around 3% in 2004 to 48% in 2012 and 2013. The share then fell to 38% in 2014 but then recovered to 45% and rose even further to 49% in 2016. We are seeing a record high 51% (if sustained) in 2017. The growth in EM Uridashi issuance has really come 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 but has come in near 33% in both 2016 and 2017 (so far).
EM CURRENCY BREAKDOWN
TRY has a 28% share of total EM issuance so far in 2017, up from 6% in 2016. Its average share from 2005-2016 was 18%. Political risk remains an ongoing issue, as does high external vulnerabilities. However, Japan investors appear to be overlooking this as the central bank maintains its tight monetary stance.
BRL has a 16% share of total EM issuance so far in 2017, down from 47% in 2016. Its average share from 2005-2016 was 28%. Brazil interest rates are falling sharply, and have likely hurt the real’s attractiveness. Here too, political risk remains an ongoing issue.
ZAR has a 6% share of total EM issuance so far in 2017, down from 12% in 2016. Its average share from 2005-2016 was 35%. The SARB started the easing cycle in July, which should erode the rand’s attractiveness. Heightened political and downgrade risks lie ahead as well, and it appears that investors are not being compensated enough.
MXN has an 16% share of total EM issuance so far in 2017, up from 5% in 2016. Its average share from 2005-2016 was 10%. Fundamentals remain solid, and the peso has finally found some traction from Banco de Mexico’s tightening cycle. Rates are likely to remain at current levels until Q2 2018.
RUB has a 13% share of total EM issuance so far in 2017, up from 6% in 2016. Its average share from 2005-2016 was 2%. The ruble could get some more traction if oil prices rise more. However, the central bank has resumed cutting rates, likely eroding the ruble’s allure.
Taken together, these five EM currencies make up nearly 80% of the EM Uridashi issuance so far in 2017. This is up slightly from 76% in 2016, which was the lowest share on record. From 2005-2014, 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 to Japanese investors as it once was due to deteriorating fundamentals, falling significantly below its longer-term average share since 2010. BRL has also seen its share fall below its long-term share this year. Of this main group, RUB is seeing the biggest positive divergence so far this year from its longer-term average while MXN and TRY are seeing smaller positive divergences.
Most importantly, INR continues to get a greater share. That share stands at 19% so far in 2017 vs. the average of 4% from 2005-2016. This also follows two good years, when INR had a 19% share in 2016 and 17% in 2015. IDR had seen its share grow to 5% from 2014-2016 vs. the 2% average from 2005-2016, but the share has fallen back to only 2% so far in 2017.
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 2017, 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 intensification of Fed tightening concerns could cause more disruptions in the global financial markets.