* 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
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
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
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
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)