Reg S and the Rates Outlook
The stickiness of US dollar Reg S demand and its ongoing availability as a funding option is a common question of potential market entrants. Market sources say higher US dollar rates are only likely to drive up demand for the currency in Asia, while the retreat of QE should have less impact in the region than elsewhere.
The final impact of quantitative tapering on bond markets globally is largely unknown. But with the Federal Reserve (Fed) raising rates three times in 2017 and widely expected to continue down the same path in 2018, the global rates and yield environment is clearly a key consideration for an Asian market denominated in the US currency.
ANZ’s co-head of capital markets, Paul White, believes Asian markets will shoulder less impact from the withdrawal of central-bank liquidity than Europe and the US – and should thus remain attractive. “If anything, one could argue that there has been no impact in Asia from QE on the way in and, so far, there has been minimal impact as QE is reduced,” he tells KangaNews.
In fact, White insists the positives in regional growth trends largely outweigh the negatives. “There are very positive growth numbers in Asia. We are also seeing rating upgrades from the agencies for countries such as India, Indonesia, Malaysia and South Korea. The trend is positive for the region, and this can only make it more attractive to Australian borrowers looking to diversify their funding further in Asian capital markets.”
Andrew Duncan, managing director, debt capital markets at HSBC, agrees that the broader dynamic of increasing maturity will match any downward trend that might result from a QE unwind. “Investors need stability in order to invest, but they are also capable of adjusting over time.”
Lorna Greene, director, debt syndicate and origination, Asia at National Australia Bank, predicts a year of relative stability for the US dollar Reg S market. Issuance should be sparked by vaunted government infrastructure projects such as China’s “One Belt, One Road” initiative.
The potential for growth in Australian corporate issuance will depend on pricing, according to Natalie Vanstone, managing director, debt capital markets at J.P. Morgan. She adds that the US private placement option among others remains highly competitive. But with ever-increasing execution certainty, she expects Reg S to come onto the radar of more Australian corporate borrowers looking to diversify their debt.
“We don’t see any near-term shift in market fundamentals that would see the Reg S market regress,” says Vanstone. “We expect the market to continue to grow and keep attracting the type of issuance that it has been, which in turn will encourage further development and greater depth of liquidity.”
