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Party is back on - thanks Ben

Source : REUTERS
Last Updated: Thu, Sep 19, 2013 12:30 hrs

* Asian issuers rush to issue bonds amid rally

* Another record year for dollar bonds in sight

* Gains raise bubble questions

By Christopher Langner

SINGAPORE, Sept 19 (IFR) - The Fed chairman lived up to his nickname of Helicopter Ben this week and walked out of the FOMC meeting saying the central bank will continue to buy US$85bn a month of Treasuries and mortgage-backed securities.

The unexpected delay in the tapering of monetary stimulus prompted credit markets to gap in. The yield on the 10-year US Treasury dropped 15bp right after Bernanke spoke, and Asian dollar bonds not only followed, but their spreads tightened 5bp-10bp more today.

The moves had bankers scrambling to turn more deals live before the Fed reverses its stance.

On Thursday alone, three mandates were announced, two of them from Chinese state-owned companies, which analysts expect to come in size. In fact, talk was that the more than 20 issuers that have met investors in the past couple of months without printing any bonds afterwards will be elbowing for room with a swathe of other companies.

"The party is back on, at least for now," said one banker in Hong Kong.

Next week, bankers have predicted there could be as many as seven transactions worth more than US$5bn - maybe a lot more. Adding all the deals that have already been announced, there is a potential pipeline of at least US$15bn more.

Issuance in dollars from Asia excluding Japan and Australia has already reached US$102bn. If all the issuance that bankers expect to push through gets done, the region may even beat last year's US$124.7bn record before December.

The hurdle, said one analyst, is if accounts run out of money to invest. Funds are still ailing from losses incurred during the summer, and while cash rates are in the high single digits, he said, there is only so much money to invest.

Besides, bond funds across the globe have seen very high redemptions as investors realized that a 30-year bull market for Treasuries - and fixed income in general - had reached an end.

Given the price action seen on Thursday after the FOMC announcement, though, investors are again ignoring the end of the bull market for bonds. "The market had priced in some tapering, so there has been a sharp retracement now that it did not happen," said one credit analyst in Singapore.

"It was very binary, if we had a bad Fed meeting, I was already planning to take a week's vacation," said one banker. "Now I don't even think I will be able to see my wife this week."

If investors are again betting on lower rates, bankers and issuers seem to understand that the current rock-bottom yields are not going to last much longer. "The genie is out of the bottle, now we know that the tapering will happen," said the credit analyst.

This certainty of higher rates, combined with the temporary relief from their postponement, is acting as an additional incentive to bring dollar deals at a fast clip.

Investors, however, may want to brush off the dust from a research paper published in 2003 by Princeton scholars Dilip Abreu and Markus K. Brunnermeier entitled "Bubbles and Crashes".

The researchers conclude that: "We suppose that rational arbitrageurs understand that the market will eventually collapse but meanwhile would like to ride the bubble as it continues to grow and generate high returns. Ideally, they would like to exit the market just prior to the crash."

In other words, any hint that there is further to go will prompt even rational investors to continue investing.

The trouble, as Brunnermeier and Abreu conclude, is that: "Market timing is a difficult task. Our arbitrageurs realize that they will, for a variety of reasons, come up with different solutions to this optimal timing problem. This dispersion of exit strategies and the consequent lack of synchronization are precisely what permit the bubble to grow, despite the fact that the bubble bursts as soon as sufficient mass of traders sells out."

The timing, therefore, is ripe for issuers. They had better make the most of the conditions while they can. (Reporting By Christopher Langner, editing by Julian Baker)




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