Investors buy Asian bonds to play dollar rise
* Foreign interest in Dim Sum and Australian bonds spikes
* Global investors become comfortable with currency risk
* Dollar-peg allows higher yield with low voaltility
By Christopher Langner
March 28 (IFR) - Overseas interest in bonds denominated in renminbi and Australian dollars is surging as yield-hungry investors turn to currencies that have become increasingly correlated to the US dollar.
Order books on recent offshore renminbi bonds have showed higher overseas demand than usual, while international funds have helped drive spreads tighter on Australian mortgage-backed securities.
This suggests that global investors are turning to bonds issued in Asian currencies as a smart way to play the rise in the US dollar, while getting some additional yield.
"Even private banks have been moving some of their dollar-denominated assets into some of the Asian currencies correlated to the dollar," said a credit analyst in Hong Kong.
China's insistence on pegging its currency to the dollar has cost it dearly of late as the yen and the euro depreciate, while the renminbi continues to move in lockstep with the greenback.
The Australian dollar, however, is also tracking the US dollar higher against the other G3 currencies, and the Chinese currency has moved closely to the Australian currency 67% of the time in the past 25 days, or as bankers say, the correlation between the two is around 0.67. Any number above 0.5 suggests a very high correlation.
China is said to have been fuelling some of that close relationship, after PRC officials met their Australian counterparts last year to ask if they could buy municipal bonds Down Under.
The renminbi has appreciated some 10% against the yen this year, almost exactly the same gain of the Australian dollar against the Japanese currency. The yen has slid from 86.7 to the US dollar in the first days of 2013 to 94.06, a 9.1% drop.
The moves are similar against the euro. Since February 1, the Aussie dollar has gained more than 6% against the euro, while the renminbi has added close to 7%. The euro has dropped from US$1.364 to US$1.278 during the same period.
The high correlation between the Australian, Chinese and US units means some global investors are becoming more comfortable with Aussie dollar and renminbi assets - where returns are far higher than in the US market.
One analyst pointed to the strong participation of central banks in the Rmb12bn book for a Rmb2.5bn Dim Sum bond from state-owned China Minmetals Corp last week as evidence that investors are coming into the renminbi in search of safe yet higher yields. State-owned Minmetals attracted orders from 106 accounts. Fund managers took 48% of the issue, banks 26%, central banks 16% and private banks 10%.
Central banks often hold their reserves in dollars, or very liquid currencies. However, money held in dollars will have to be invested in highly rated bonds in that currency, and those are currently yielding less than 1.5% on average. At the same time, the offshore renminbi bonds from China Minmetals yielded 3.65%.
Renault's Rmb750m Dim Sum earlier this week provided even clearer indications of the trend as the Euronext-listed issue saw 17% of the total going to Swiss and European accounts.
The Australian RMBS arena is also benefiting from this fad. Last month, Bendigo and Adelaide Bank priced its top tranche of A$790m (US$790m) AAA-rated RMBS at 95bp over one-month BBSW, well inside the 110bp that National Australia Bank paid for its A$800m of Class A1 notes on December 6.
"Normally, you'd expect a [Bendigo and Adelaide] deal to price 5bp-10bp back of major bank levels, so this looks pretty aggressive at first sight. However, there is very strong offshore demand out of Europe that is clearly helping to drive the contraction," said a syndication manager away from the deal.
A similar pattern was seen last week, when ING doubled the size of its first RMBS issue of the year to A$1bn. The deal saw the participation of 21 investors with domestic accounts taking 63.4% and offshore a sizeable 36.6% - confirming the increased interest from overseas funds.
"The deal is part of our ongoing efforts to diversify our funding base and we're very happy to see a wider breadth of investors for this particular deal," said ING Direct treasurer Michael Witts. ING Direct is Australia's fifth-largest home lender.
Again, 95bp over BBSW is now close to 4%. The average yield on the investment-grade index of Merrill Lynch, with average life of one to three years, is only 1.5%. So, buying Triple A Australian RMBS seems to be a no-brainer.
Before, the argument against buying offshore renminbi bonds of state-owned entities or Australian RMBS might have been the currency exposure. It appears, however, that has now become part of the appeal. (Reporting By Christopher Langner; Additional reporting by Nethelie Wong and John Weavers; Editing by Steve Garton)