Through mid-October 2018, foreign currency Uridashi issuance totaled $7.6 bln. If this pace is sustained, the full year total of $9.6 bln would represent an increase from $8.4 bln in 2017 but would fall short of the $12 bln issued in 2016.
However, EM Uridashi issuance totaled only $1.8 bln through mid-October. If sustained, the full year total of $2.3 bln would represent a significant drop from $4.1 bln in 2017. Indeed, it would be the lowest EM issuance since the $1.3 bln total in 2007.
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 has since fallen steadily to $8.4 bln in 2017, the lowest since 2003.
The share of EM-denominated Uridashi bonds increased steadily from zero in 2003 to 46% in 2012 and 2013. The share then fell to 35% in 2014 but then recovered to 42% in 2015 and rose even further to a record high 49% in 2017. That makes the sharp drop to 24% so far in 2018 even more noteworthy, and this potential trend change bears watching as it seems to reflect broad-based negative global sentiment on EM.
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 but remains low, coming in at around 27% in 2018 (so far). Rather, the US dollar has crowded out EM by accounting for a whopping 49% of total non-JPY issuance so far this year. This is the highest share on record.
EM CURRENCY BREAKDOWN
TRY has a 42% share of total EM issuance so far in 2018, up from 29% in 2017. Its average share from 2005-2017 was 15%. Political risk remains an ongoing issue, as does high external vulnerability and rising inflation. However, Japan investors appear to be overlooking this as the central bank has tightened monetary policy in recent months.
BRL has a 28% share of total EM issuance so far in 2018, up from 16% in 2017. Its average share from 2005-2017 was 28%. 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 soon, as well as a potentially favorable election outcome.
ZAR has a 3% share of total EM issuance so far in 2018, down from 6% 2017. Its average share from 2005-2017 was 36%. The SARB restarted the easing cycle in March, which further eroded the rand’s attractiveness. Despite Zuma’s ouster, we still see political risk ahead. Coupled with poor fundamentals, the rand should continue to suffer.
MXN has an 6% share of total EM issuance so far in 2018, down from 17% in 2017. Its average share from 2005-2017 was 11%. Fundamentals are solid, but the peso has not benefitted much from Banco de Mexico’s tightening cycle. Political risk remains high until incoming President AMLO’s policies become known.
RUB has 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 remain high. However, more sanctions are likely and the negative impact on the ruble may not be offset by the central bank’s tightening cycle.
Taken together, these five EM currencies make up 82% of the EM Uridashi issuance so far in 2018. This is up from 75% in 2015 (the lowest share on record) and nearly 80% 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. MXN has also seen its share fall below the long-term averages in recent years. Of this main group, TRY is seeing the biggest positive divergence so far this year from its longer-term average while BRL and RUB are tracking close to their longer-term averages.
Most significantly, INR continues to get a larger than usual share. That share stands at 17% so far in 2018, down slightly from 19% from 2015-2017 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 2% longer-term average from 2005-2017. However, its share has fallen back to 2% in 2017 and so far in 2018.
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.