ING predicts record bond Asian issuance in 2005

By Reshmi Basu

New York, Dec. 8 - ING Financial Markets predicts that Asian issuance of dollar-denominated bonds will near if not exceed 2004's $30 billion total, driven by increasing demand.

While higher supply will eventually widen credit spreads, this will not happen in the near term, according to the report "Asian US$ Bonds: The Asian central bank threat to the liquidity rally in credit."

Instead excess liquidity from Asian buyers and credit rating upgrades should compress spreads further, with investors especially rewarded for taking more price and credit risk.

In the report, ING also states that the threat to U.S Treasuries from Asian central bank diversification away from U.S dollar-denominated assets is over-exaggerated. With the exception of the Bank of Japan, central banks in the rest of Asia have already been diversifying away from U.S Treasuries, with no perceptible impact on Treasury yields.

And Japan shows no signs of diversifying out of Treasuries, highlighting the country's exchange rate policy. The lesson learned from its successful intervention in January 2004 was that massive intervention works and can reverse the acceleration of the yen in the short term.

ING anticipates another massive intervention by Japan when the extent of trade-weighted yen appreciation matches the pre-January 2004 levels. The proceeds from the successful intervention will be invested in U.S Treasuries, said ING.

"We do not see Asian central bank behavior threatening higher U.S Treasury yields, which leaves as the main threat the outlook for U.S growth and inflation," said Tim Condon, ING's head of financial markets research in Asia, in the report.

Also, ING predicts the rating agencies will upgrade Korea to A2/A from A3/A-, Malaysia to A2/A from Baa1/A- and Thailand to A3/A- from Baa1/BBB+. ING expects S&P to upgrade its rating on China of BBB+ by one notch.

On the other hand, the Philippines is unlikely to see a downgrade. Furthermore, the pricing in of a two-notch downgrade by the market is too pessimistic.

ING's top Asian picks include paper from the banking sector because of the improving trends in its credit profile. Bond recommendations include Equitable PCI's 2013s callable in 2008, Metrobank's 2013s callable in 2008 and Bangkok Bank's 2029s.

Of the telecom credits, ING recommends Philippines Long-Distance Telephone's 2012s and 2017s.

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