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Deutsche Bank’s 2010 outlook for the Asian bond markets

January 07, 2010 | "FinanceAsia.com"

Deutsche's Patrick Tsang and Mark Whitcroft share their views on expected trends in the Asian bond markets.

In a record year for bond issuance in Asia, Deutsche Bank finished 2009 as the most active debt capital markets bank in the region and, as 2010 is forecast to be another active year for the bond markets, the bank is sharing its outlook for the coming 12 months.

Deutsche expects redemptions to amount to approximately $33 billion, with $24 billion set to mature and another $8 billion to $9 billion worth of bonds becoming callable, which will create a natural demand for new issues. The total new issuance in 2009 amounted to $60.6 billion, according to Dealogic.

Straight off the bat, the market has been dominated by news of potential sovereign issuance, particularly by the Philippines, Indonesia, Malaysia and Vietnam. It is expected that new issues will also be launched by borrowers from Hong Kong, Korea and India.

Last year Korea accounted for 30.5% of the total $65.6 billion of bond issuance in G3 currencies. Deutsche expects this proportion to decrease as borrowers from other countries, particularly India, return to the market. It is expected that India will return in force with financial institutions, corporate and quasi-sovereigns all accessing the market.

Of particular interest is how the Chinese bond markets will pan out over the course of the year. Chinese property companies are expected to tap the high-yield market again this year, but investment-grade corporate bonds are likely to be less abundant.

"Domestic markets in China currently have so much liquidity at such a compelling price that going abroad will be more to build profile with offshore investors," said Mark Whitcroft, global risk syndicate manager at Deutsche.

Patrick Tsang, head of cross-border debt capital markets for Asia ex-Japan, added that this is particularly true of the blue-chip Chinese companies; offshore financing is not a top priority at this stage so any such activity would be a branding/benchmarking exercise in order to diversify their investor base.

For the corporate sector outside China, Whitcroft and Tsang expect the loan market to decline in importance. Bond issuance in G3 currencies by blue-chips will continue with smaller firms likely to follow suit.

Tsang noted that, "while rates are very stable now, there is a strong possibility of rates increasing in the second half of the year. We can expect that when that happens the increase may be rapid". It's too early to predict how the market will behave, but Deutsche recognises that the more prudent borrowers will launch deals during the first half of this year to secure financing, while others may wish to sit it out to see how the market behaves.

Deutsche also anticipates that as investor confidence grows, investors will be more receptive to the more complex financing structures that were evident in the pre-crisis days. With this improvement in risk appetite, it is expected that the demand for high-yield products will return in 2010.

As credit fundamentals continue to improve, issues from the private and banking sectors will pose less of a risk for investors. Exposure to risk from these sectors is expected to be on a case-by-case basis only. Risks for the Asian bond market will most likely come from outside of the region. In particular, volatile interest rates, higher inflation and an increase of sovereign credit risk in European emerging markets, which are expected to be a major supplier of sovereign issuance this year. Also, Deutsche predicts that US Treasury yields will rise in the second half of this year.

According to Dealogic, Deutsche Bank has been a top three bookrunner in debt capital markets over the last five years. In 2009 the bank was the number one bookrunner in the region, with $9.6 billion worth of deal credits from 40 issues.

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