Uridashi Issuance in H1 2016 - BBH

Research Team at BBH, notes that the foreign currency Uridashi issuance has picked up in H1 2016 after an overall weak 2015.  

Key Quotes

“Last year, the annual total was $10 bln for foreign currency Uridashi issuance.  This was the lowest since the $9 bln issued in 2007.  The EM total for 2015 was $4.75 bln, the lowest since the $3.7 bln issued in 2009.  H1 data suggests an improved $5.9 bln pace for EM issuance this year.

Outlook for 2016

Foreign currency issuance totaled $6.15 bln in H1 2016.  If this pace were to be sustained, the annual projected total of $12.3 bln would an improvement over 2015 but still the second lowest since 2007.  The $10 bln in 2015 for total foreign currency-denominated Uridashi issuance comes after $13.4 bln in 2014 and $12.6 bln in 2013.  

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 $20 bln in 2010 before falling to around $15.7 bln in 2011 and then roughly around $13 bln from 2012-2014.  

The share of EM-denominated Uridashi bonds increased steadily from around 3% in 2004 to peak at around 50% in 2012.  It then fell to 48% in 2013 and then 39% in 2014.  In 2015, the EM share recovered to 47% and so far this year to 48%.  The 2004-2012 growth in EM Uridashi issuance really 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 30% in 2013.  The antipodean share rebounded to 42% in 2014, but has fallen back to around 35% in 2015 and 30% in 2016 (to date).

Japan capital flows

According to the weekly MOF data, Japan investors have been steady buyers of foreign bonds.  The 52-week total (through the week ending June 24) stands at nearly $200 bln.  This is the highest since December 2012.  These purchases have outpaced that of foreign equities.  Here, the 52-week total (through the week ending June 24) was steady at $72 bln.  This is the lowest since February 2015.

Background

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 in EM, we think that the Japanese flows into EM bonds should continue in the coming months.  While the global backdrop should remain conducive to higher yielding currencies, any return of Fed tightening concerns could cause disruptions in the global financial markets.  Offsetting this somewhat are the recent developments in both Europe and Japan, where further QE has been seen and even more action appears likely.”