Debt issuers crowd into local markets

Enthusiasm for local-currency debt remains undimmed by events in Japan and the Middle East

Favourable market conditions and international investor demand for local currency debt has not been derailed by events in Japan and the Middle East, investors said this weekend.

Latin sovereigns such as Peru and Uruguay, as well as corporates, are using current demand to further dedollarize economies and develop local capital markets. They are keen to explore the window of opportunity before interest rate rises attract capital back to developed markets.

Mario Bergara, president of the Central Bank of Uruguay, said policymakers in the country are looking to rebalance the composition of sovereign debt to local currency, and to encourage moves by corporates to reduce dollar-denominated debt. Countries need to prepare for a higher interest rate environment; very low interest rates are not forever, he cautions.

There is growing consensus that US and European governments will need to raise rates sooner rather than later.

Mark Carney, governor of the bank of Canada, believes there is a message in the preference of investors for short duration bonds, which indicates inflation risk is not adequately compensated and goes back to monetary policies, he noted.

There are real risks at present with inflation, he said, and the possibility of a sudden shift of fund flows to developed markets. Bergara, however, does not think any such change will be sudden, saying there are likely to be signs ahead of any such shift.

Bankers continue to see healthy demand from foreign investors for local currency bonds. Maxim Volkov, managing director, Latin America capital markets at Bank of America Merrill Lynch, reported a brisk calendar and predicts cross border fixed-income issuance will reach $120bn this year compared to $91bn last year.

A good example of dedollarization is Peru, says Volkov. In 2002, just 8% of issuance was in local currency while 2010 was more than 50% in nuevos soles. Dollar debt was 70% and today makes up less than 50% of total outstanding debt. Colombia, too, is seeing more local currency debt issuance. The bank has recently sold local currency issues to foreign investors for issuers out of both countries. Recent participation from international investors is as much as 90% in such deals, he noted.

This year, there are more high yield and first time issuers in the makeup of Latin deals, Volkov said. The crises in Japan and the Middle East did create volatility through early March, but he says investor interest has subsequently returned.

Merrill does not see a major increase in rates this year and he notes that US markets have been stable with 10-year UST yields, which spiked in the first weeks of 2011, falling more recently to current levels of 3.40%. The bank has predicted a rate of 4% by year end.

One concern might be depreciation of Latin currencies but Volkov is sanguine about this. The bank predicts the Brazilian real will fall to 1.85 against the dollar by year end but the Peruvian sol will slightly appreciate to some 2.60 by year end.

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