Indonesia, Malaysia Bonds Winners After Fed, Nomura Says

  • Fed staying put seen positive for emerging-market credit
  • Speculation on Fed's next move seen crimping debt offerings

Indonesian and Malaysian sovereign bonds stand to benefit the most in Asia from the Federal Reserve’s decision against an interest rate increase as they have high foreign ownership, according to Nomura Holdings Inc. 

The extra yield that investors demand to hold Indonesia’s $2 billion 4.125 percent 2025 notes over similar-maturity U.S. Treasuries dropped 9 basis points to a one-month low of 240 basis points. The spread on Malaysia’s $1 billion 3.043 percent 2025 bonds declined 1.5 basis points.

“A Fed no hike with dovish guidance is the most positive outcome that could have occurred for emerging-market assets,” said Gaurav Singhal, a credit analyst at Nomura in Hong Kong. “We expect a relief rally, with Indonesia and Malaysia sovereign credits to benefit the most from this outcome because of high foreign ownership of their securities.”

That would mark a turnaround for the nations’ debt after spreads rose to records last month as Southeast Asia’s slowing growth, China’s devaluation of the yuan and the outlook for higher U.S. interest rates sparked a selloff. The rout also sent the ringgit and the rupiah to their lowest levels since 1998 earlier this month. Addressing the turbulence, Fed Chair Janet Yellen said policy makers focused particularly on China and emerging markets.

Issuance Impact

Continuing speculation over the Fed’s next steps “could keep a lid on overall issuance levels between now and year-end,” said Mark Reade, an analyst at Mizuho Securities Asia Ltd. in Hong Kong. “Asian dollar supply will still come, but it may be in fits and starts as we have seen in the past couple of months.”

Sales of notes in the U.S. currency by corporates in Asia excluding Japan have dropped 7.4 percent this year to $126.1 billion as many firms including Chinese developers return to domestic financing markets to avoid foreign exchange risks and for lower funding costs, Bloomberg-compiled data show.

“You can either interpret the Fed decision as them signaling lower rates for longer which is good for credit, or the biggest central bank acknowledging rising risk in emerging markets, which is negative for risk assets,” said Leong Wai Hoong, a senior money manager in Singapore at Nikko Asset Management Co. “For now, credit spreads appear to tighten a little bit, so it should be a brief rally.”

While the Fed opted to keep rates near zero for now, Yellen told a press conference most policy makers still expect to raise rates this year. She flagged the strength of the U.S. economy, tying the decision to delay liftoff to uncertainty about the outlook abroad and recent market turbulence.

For corporate borrowers,“in the short-term it’s probably a good thing in terms of debt serviceability because rates are lower, but in the long-term they’re going to have to raise rates to normalize things and the biggest impact will be in emerging markets and heavily leveraged companies,” said Vivek Prabhu, deputy head of credit and fixed income at Perpetual Ltd. in Sydney.

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