Panda Bonds Drawing Crowds as Americans Turn Cool on Europe Debt

  • Poland considering sale of yuan bonds to Chinese investors
  • Hungary looking to issue yuan bonds on international market

Governments in Europe’s developing markets are looking east to seize on a shift in investor demand.

Poland, which saw Asians overtake Americans as its second-biggest holders of domestic debt last year, is sending officials to China as early as next month to discuss the sale of yuan-denominated notes to local investors. Russian issuers including VTB Group are also contemplating their first sales to Chinese buyers, while Hungary has already held meetings for a potential sale of yuan bonds abroad.

The pivot east for countries that have traditionally relied on demand for their debt from Europe and the U.S. is happening as Asian central banks boost stimulus to shore up their economies while the Federal Reserve restarts a cycle of interest-rate increases that diminished the appeal of emerging markets. As investors from Asia bought more Polish debt last year, some of their western peers cut positions amid mounting concern the country’s new government would introduce policies that threaten its haven status.

"Investors from Asia are doubtlessly some kind of a safety buffer for the Finance Ministry," said Jaroslaw Janecki, the Warsaw-based chief economist at Societe Generale SA’s Polish unit. "From the point of view of debt management, this provides security against potential changes in the portfolios of European clients. We have to remember about Fed rate increases, they could further attract buyers to U.S. debt.”

Poland’s sale would be the first by a government from eastern Europe and follow offerings by South Korea and British Columbia to local investors. The western Canadian province raised 3 billion yuan ($456 million) from a three-year bond priced to yield 2.95 percent on Jan. 21 and South Korea paid 3 percent to borrow the same amount in similar-maturity securities in December. Both issuers have credit ratings higher than Poland.

“We have received signals there is interest in such an issue and there are investors asking about it,” Deputy Finance Minister Piotr Nowak was quoted as saying in an interview by Puls Biznesu published Feb. 8. A delegation may visit China in March or April to discuss the potential sale, he said. Finance Ministry spokeswoman Alina Urban declined to make further comment on Monday.

Poland was the first emerging market to sell Eurobonds this year, raising 1.75 billion euros ($1.95 billion) in 10-year and 20-year securities. The yield on the bond due January 2026 was 1.54 percent at 1:09 p.m. in Warsaw, the rate at which it was offered on Jan. 11. The country also has outstanding debt in Swiss francs, dollars and yen.

China has the world’s third-largest bond market after the U.S. and Japan, but only limited issuance by foreign or offshore debtors, making it likely that appetite for credits such as Poland and Hungary will be “quite strong,”  according to Per Hammarlund, the chief emerging-market strategist at SEB SA in Stockholm.

“They are looking to tap a largely unexplored investor base in China," Hammarlund said on Monday.

Dim-Sum Bonds

Hungary, which held investor meetings in January, has delayed its yuan fund-raising plan until at least March, the Debt Management Agency said an e-mailed response to questions, citing market volatility, low liquidity and the lunar New Year holidays. Russian banks, including Gazprombank PJSC and VTB, have also sold so-called dim sum bonds.

The interest in Chinese funding comes on the back of the yuan’s inclusion in the International Monetary Fund’s basket of reserve currencies in December, a key step in the country’s decades-long effort to gain international recognition for its currency as a global benchmark.

“This is the new reality that many have failed to understand in the past few years,” Simon Quijano-Evans, the chief emerging-markets strategist at Commerzbank AG in London, said by e-mail on Monday. Political rapprochement, the rising profile of the yuan and the low risk of appreciation in the yuan in the coming years are helping eastern European nations find demand in the new market, he said.

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