The non-core currency bond markets came into 2006 with renewed optimism. The push into new currencies that dominated the market last year has continued with issuers beginning to embrace a broad range of African currency markets including Botswanan pula, Egyptian pounds, Tanzanian shillings and Namibian dollars. Many have been structured as synthetic transactions as the clearing houses catch up with the new trends, but investors have embraced the opportunity to pick-up yield in a historically low rate environment.
Bankers have put significant resources into opening new currency markets, but as recent events have highlighted, they are not without their risks. Just one week prior to IFR's non-core bond markets roundtable, Iceland came under some ratings pressure from Fitch amid fears of an overheating economy. Through late 2005, investors piled into the newly opened Icelandic kronor bond market to take advantage of the yield pick-up. But when the currency plummeted in late February, the bonds fell alongside and many investors are now nursing significant losses. Roundtable participants were generally upbeat on the development of new currency markets throughout the rest of the year, but were quick to highlight the risks that can be associated with high-yielding currencies.
In the more developed non-core dollar markets there have also been some stark changes. Last year saw the development of a Canadian Maple bond market as the removal of foreign content limits for Canadian investors opened the floodgates for diversification away from domestic names. The arbitrage may have fallen by the wayside, but Europe's frequent borrowers have found that Maple bonds offer scope for investor diversification in larger volume than many other markets. The change has also spurred the development of a capital securities market with a number of European banks finding a good arbitrage with Canadian dollar denominated Lower Tier 2 transactions. Participants were optimistic about the growth prospects in the Maple bond market but most believe that the real boom in issuance could be another year away.
Australia has one of the most developed markets in the non-core segment, and although the Aussie dollar Eurobond market has been relatively quiet over the last few years, the kangaroo market has witnessed tremendous growth. Participants discussed the apparent merging of these two markets and while the supranational and agency borrowers found that there was little or no separation, the same does not appear to be true for financial issuers. One of the big surprises of 2005 was the tremendous growth in the New Zealand dollar market where large volume issuers began to offer bigger transactions in Global format. The roundtable attendees agreed that while last year's growth in volumes has certainly put the currency on the map, it is still represents a very small part of global indices and as such that growth is unlikely to be repeated.
The changes seen over the last year have come on the back of the low yield environment and participants viewed the changing rate environment in Japan, the US and Europe as the biggest threat to niche currency markets. Even so, the attending issuers pointed out that diversification plays an increasingly important part of their funding programmes and as such the future looks relatively buoyant.