* Corporate bond offerings from local blue-chips flounder
* Investors wary as benchmark rates rise
* Government bond yields reach five-year high
By Nethelie Wong
SINGAPORE, Sept 5 (IFR) - Volatility has finally swept
across Taiwan's typically dependable bond market, where
corporate issuers usually have little trouble finding investor
In the past couple of weeks, blue-chip issuers Taiwan Power
and Taiwan Semiconductor Manufacturing Corp failed to attract
sufficient orders on new issues and local dealmakers see these
exceptional demand shortfalls as indicative of a negative shift
in the Taiwanese debt capital markets.
The failures may have wider implications than just reduced
transaction sizes for local issuers too. The island has the
third largest mutual fund pool in Asia, as well as the third
biggest insurance industry, with some US$500bn under management.
As such, it is an important source of demand for fixed income
all over the region.
A generally soft tone has prevailed in the domestic bond
market since May, when US Federal Reserve Chairman Ben Bernanke
first indicated that he would decelerate the central bank's
buying of US Treasuries.
But Taiwan's bond market has taken a turn for the worse of
late. The yield on the local 10-year government bond jumped 35bp
to 1.77% on August 28, the highest level since November 7 2008.
Government bond prices, which move inversely to yields, have
recovered slightly, with the 10-year at 1.73% today, but the
sharp move has spooked local investors.
The fear may be warranted. In a research note today, rating
agency Standard & Poor's said that: "Higher yields on
bonds would lower the price of insurers' existing
bond portfolios and in turn weaken insurers' reported equity
The result has been a slowdown of the new issue market. "A
wait-and-see attitude dominates the market as people worry about
the interest-rate trend once the US [quantitative easing]
tapering starts," said a local bond trader. "The general view is
that the domestic interest rates will continue to rise in step
with those in the US."
Taiwan Power's August fundraising provided the first
indication of the effect of the rising rates. The issuer priced
a NT$3.87bn (US$117m) three-year corporate bond at 1.35% on
August 28. Yet, market conditions forced the borrower to abandon
the planned offerings of bonds at tenors of five, seven and 10
Taiwan Power was forced to raise less than a third of its
targeted NT$12bn as well. That is unprecedented for the
country's largest corporate issuer.
On top of that, the yield on Taiwan Power's three-year paper
was 5bp higher than expected.
This week, blue-chip Taiwan Semiconductor Manufacturing
Corp. did not find conditions any easier. On Monday, the
borrower sold a NT$4bn (US$121m) bond, after setting its sights
on a fundraising of as much as NT$12bn.
In its fourth deal of the year, Taiwan Semiconductor
Manufacturing Corp. priced a NT$1.4bn 5.5-year tranche at 1.6%
and a NT$2.6bn 10-year at 2.1%.
Meanwhile, on its last visit to the market in July, Taiwan
Semiconductor Manufacturing Corp. raised NT$12.5bn from an issue
that comprised a NT$4bn four-year piece at 1.34% and a NT$8.5bn
six-year piece at 1.52%.
BONDS TO LOANS
Bond bankers are especially concerned about market
conditions because they fear that rising yields and more
demanding investors will prompt companies to seek loans instead
of issuing bonds. In fact, domestic loan liquidity remains ample
with short-term rates stable in the past few months.
The 273-day Taiwan Treasury bill auction on Tuesday came at
0.5%, only slightly changed from the 0.488% logged on the last
auction for the same tenor on July 24. That also means funding
costs for banks remain fairly low, which, in turn, translates to
cheaper loan rates, as well.
For instance, LCD screen-maker AU Optronics Corp is in the
market with a NT$30bn five-year term loan at 75bp over the
primary CP rate, a level that represents a yield of only 1.647%
at current rates.
(Reporting By Nethelie Wong; Editing by Christopher Langner and