Euro appeal growing for Asian issuers

08/16/2013

* Lower funding costs may lure more away from dollars

* Another volatile week for US Treasuries on talk of tapering

* Korea Finance Corp hints at relative pricing benefits

By Christopher Langner and Neha D'Silva

SINGAPORE, Aug 16 (IFR) - Lower coupons and cheaper cross-currency swaps are leading to predictions of more euro-denominated bonds from Asian issuers.

Talk of a reduction to the US Federal Reserve's quantitative easing programme has pushed the yield on the benchmark five-year US Treasury to 1.53% as of Friday from 0.65% on May 1. Meanwhile, the yield on five-year euro mid-swaps has gone to 1.19% from 0.61%.

At the same time, the cross-currency basis swap from euros to dollars has improved from minus 30bp in late June to around minus 25bp. That means that funding in euros is becoming cheaper for the many Asian issuers that routinely swap back to dollars.

"There is no talk of tapering in Europe, so interest rate volatility should be smaller than in the Treasury market," said one banker, adding that European funds were less affected by outflows than emerging-market bond funds, which traditionally make up a good part of the investor base of Asian dollar bonds.

Investors withdrew the equivalent of 6% of assets under management in emerging markets hard currency bond funds in June, according to EPFR data. Mutual funds that invest in fixed income in the US saw net outflows of US$65.2bn that month, according to Lipper, much worse than European bond funds, which saw outflows of only 28bn (US$34.4bn).

OPPORTUNITY COST

Korea Finance Corp provided an unlikely illustration of the relative pricing benefits in euros with a five-year US dollar bond priced on Thursday.

The A+/AA- rated issuer priced a US$500m SEC-registered 2.875% bond that came flat to its US dollar curve at 145bp over US Treasuries. That translates into roughly 91bp over euro mid-swaps.

KoFC had postponed a euro-denominated issue in July after tabling initial price thoughts of 80bp over mid-swaps. Bankers in Asia are using that 11bp differential to illustrate the advantage of pricing bonds in euros, instead of dollars.

Heung Sang Kim, head of the global funding team at Korea Finance Corp, said the choice of dollars over euros had given the policy lender the best chance of engaging investors during the holiday season.

"Being told that European investors were mostly away for holidays, but the investors in Asia and the US market are looking like going for holiday during late-August, I thought the dollar market still gave us a wider opportunity in place," said Kim.

Yet, once the summer lull is over, bankers said the allure of the euro market may become stronger.

Coupon rates provide an additional argument in favour of euro-denominated bonds. If Korea Finance Corp. had sold a five-year euro-denominated bond yesterday at 80bp over mid-swaps, as it had planned in July, the security would pay a coupon of approximately 1.95% - far lower than the final 2.875% coupon KoFC achieved in dollars.

"Korean issuers always looked at it on a swapped basis, but those that are sensitive to the coupon may find the euro market more attractive," said one syndicate banker in Hong Kong. "If Treasury rates continue to rise, more issuers may want to diversify into euros."

The US rates market remains volatile, rocked by speculation over the timing of the withdrawal of the Fed's monetary stimulus. Five-year Treasury yields surged 18bp this week, while the 10-year benchmark touched its highest yield in over two years.

In contrast, European Central Bank President Mario Draghi on August 1 reaffirmed that benchmark interest rates would remain at a 0.5% record low for an extended period. His counterpart in the Bank of England, Mark Carney, said this week that there were no plans to raise benchmark rates from 0.5% until unemployment reaches 7%, something economists do not expect to happen before 2016. (Reporting By Christopher Langner; editing by Timothy Sifert and Steve Garton)



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