RPT-INVESTMENT FOCUS-Fed opens bond floodgates with 3-month grace period

Mon Sep 23, 2013 6:55am BST

By Sujata Rao

LONDON, Sept 20 (Reuters) - Global borrowers are hitting the bond roadshow trail, aiming to raise hundreds of billions of dollars in cheap financing after the U.S. Fed's surprise decision to keep its money taps open for a few more months.

As the bond issuance window unexpectedly swung wide open, a total $16.6 billion was raised on global bond markets on Thursday, leaping four-fold from the day before, Thomson Reuters data shows, while over 20 borrowers worldwide - from Italy's Intesa to Saudi conglomerate Sabic - announced issuance plans.

Among those to arrive on the scene was junk-rated Armenia's 7-year deal - dubbed the Kardashian bond - that investors were happy to buy at 6.25 percent yield. At the other end of the rating spectrum, A-rated U.S. conglomerate Cummins raised 10-year and 30-year cash at 3.75 percent and 5 percent respectively.

This is only the beginning of the debt explosion, however.

Investors reckon the boom could last at least until year-end as the Federal Reserve's Wednesday decision to postpone cutting its $85 billion-a-month stimulus effectively allows the cost of cash to stay lower for a bit longer.

"To issue bonds, you need attractive yields ideally and a cruise-speed market environment, that is, no volatility, no risks looming," said Xavier Baraton, global CIO for fixed income at HSBC Global Asset Management in New York. "The market moves we have seen since (Wednesday) address those issues."

The Fed has precipitated a steep drop in market volatility as well as U.S. Treasury yields, the benchmark off which all other assets are priced. So-called tapering is not now expected before December, while no rate rises are likely until 2015.

"There is a pricing opportunity now with 10-year U.S. yields being 15 basis points lower," Baraton said. "We can expect to see a deluge of new issues coming in."

DROUGHT TO DELUGE

The deluge had kicked off even before the Fed meeting, with many borrowers seeing early September as a last-chance saloon of sorts to raise cash cheaply.

Emerging sovereign bond sales were $13.5 billion in the first half of September, versus past averages of $2.2 billion a month. Russia and South Africa were among those that paid hefty yield premiums to get their deals done in time.

But the market flowered after an extraordinarily barren summer, which saw emerging markets' debt sales for instance slump to a fifth of year-ago levels in June and July.

U.S. high-yield issuance too was just $65 billion by Thursday for the July-September period - a third less than the same 2012 period, Baraton estimates.

Emerging markets will likely be prime beneficiaries of the Fed's decision to extend the flow of cheap money, says Pierre-Yves Bareau, CIO for emerging debt at JPMorgan Asset Management.

"The idea is, it will be a smooth transition in terms of exit from liquidity conditions and this will allow emerging markets to survive the cycle more easily," Bareau said.

That's especially so given many developing economies have run down their hard currency reserves over the summer as they battled to defend their weakening currencies.

"This is the best time for sovereigns like Croatia, Serbia, Slovenia, Hungary, Ukraine and even Turkey to build up hard currency reserves at a reasonable price," Commerzbank said.

Turkey which has met only two-thirds of this year's $6.5 billion foreign borrowing plan, named banks on Thursday for a sukuk Islamic bond. Hungary has filed papers to borrow up to $5 billion, possibly intending to use some cash to pre-fund 2014.

The Fed has also offered another chance for those seeking to raise cash to wrap up merger deals - the motivation behind telco Verizon's jumbo deal on Sept. 11

And for cash-strapped euro zone sovereigns Spain and Italy, this is an opportunity to lock in some cheap cash - so far they have completed three-quarters or more of 2013 borrowing targets.

"If I was in charge of the funding in either of those countries I would be keen to take (advantage) of the situation," said Philip Tyson, a strategist at ICAP in London. "I would have thought that it would be prudent to try and get as much pre-funding in ahead of next year as possible."

GRACE PERIOD

One thing is clear however: this is a grace period, not an open-ended blank cheque.

"The Fed is eventually going to be tapering so it's not as though reduced liquidity is out of the picture entirely," said David Spegel head of emerging debt strategy at ING Bank.

That there is appetite for risk was proved by the $700 million Armenian deal which took over $2 billion in bids. Russian Gazprom's £500 million offering garnered bids of over £5 billion, allowing it to sharply cut the yield on offer.

Investors also have money to deploy - global funds' cash holdings are at year-highs, Reuters polls show.

But aside the inevitable end to money-printing many investors are fretting about the possibility of a prolonged squabble over raising the U.S. debt ceiling to allow the government to keep borrowing. An impasse over the issue in 2011 cost the United States its triple-A rating and could badly dent market confidence if repeated.

All that will keep investors uneasy and U.S. yields around 2.6-3.0 percent, well off pre-May lows, HSBC's Baraton reckons.

"Issuers will get better conditions but we are not going to go back to normal," he said.

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