US tapering to hit lending


Asian investors are seeing tighter borrowing conditions and higher rate of defaults among Asian corporates should the United States Federal Reserve starts its tapering in 2014, according to Fitch Ratings said.

“Asian investors anticipate that tapering by the Federal Reserve, should it occur at some stage in 2014, will result in 10-year US treasuries’ yields rising above 3 percent, and wider credit spreads for Asian corporates. This, in turn, is likely to lead to tighter borrowing conditions, and a higher rate of defaults among Asian corporates,” Fitch said.

It added that those were among some of the key comments made by more than 20 fixed-income investors based in Singapore and Hong Kong that Fitch met with in early November 2013.

The ratings agency also said that there were mixed expectations on the exact timing of tapering by the Fed, ranging from the first quarter to third quarter of 2014.

It noted that some investors suggested that the extent of the negative impact on the bond markets could have been mitigated, if tapering had started in September when the market was originally anticipating it.

“Most investors believed that a significant liquidity drain will occur once tapering is officially confirmed as investors are likely to reduce their exposure to bonds in order to minimize mark-to-market losses as US treasury rates rise,” it said.

Fitch also mentioned that tightened liquidity could last more than six months, until investors are confident that rates have stabilized. However, investors stated that they are unlikely to exit their existing portfolio in a “fire sale” manner.

It added that once the tapering begins, investments will be subject to more stringent selection criteria, and higher premiums will be required for the same issuers.

The agency said that high-grade bonds will potentially benefit from the flight to quality as the liquidity tightens. Market leaders and repeat issuers with higher ratings will be preferred. In contrast, debut issuers will find it more difficult to issue, unless they are well-known or strong State-Owned Entities.

“Investors anticipate that onshore liquidity in emerging markets will be affected more than developed markets within Asia-Pacific,” it stated.

For the Philippines, the expansion in credits to the domestic sector and adjustments in the special deposits accounts (SDA) continue to be the growth driver of the country’s money supply or domestic liquidity (M3).

Data from the Bangko Sentral ng Pilipinas showed that M3 increased by 31 percent year-on-year at end-September 2013 to reach P6.2 trillion.

Meanwhile, foreign portfolio investments or “hot money” also expanded as it yielded inflows of about $969.33 million in October compared to the $40.16 million recorded in the same period last year.


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