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Eurobonds to slow, await return of Asian investors

LONDON: The flow of international bonds will likely slow following record levels of issuance during the first quarter of 1996, syndicate managers said on Tuesday.

But the return of Asian investors in April, together with a continuing strong bid from European retail investors, should keep the market in solid form.

"We have had a difficult quarter, and issuance will slow because of a more cautious approach," said a syndicate manager at a British bank. "But the retail bid remains strong, which will support the market to some extent."

A syndicate manager at a U.S. bank said: "Absolute volumes have been extremely large so far, and we expect a bit of a downturn for the next quarter".

"Borrowers have also got lower requirements, with a lot of negotiated business as well as sub-Libor, arbitrage-driven funding already taken care of," he added.

International bonds worth the equivalent of $185 billion were issued in the first quarter, a 73 percent increase on the same period in 1995, Euromoney Bondware data showed.

The year started with bond market players expecting a bull run, but this reversed into bearish sentiment when government bond markets fell in February.

Underwriters, especially in the mark sector, sustained losses as the value of unsold bonds tumbled, syndicate managers said. But this would not necessarily have an impact on issuance, they added.

"Underwriters have very short memories. And a falling market can sometimes even boost business because banks keep wanting to bring deals with current coupons," said one.

Issuance in marks boomed in the first two months of 1996, with volumes overtaking those in dollars at one stage.

Much of this surge was due to heavy mark buying from Asian central banks and other investors, dealers said.

As Asian investors make their asset allocation decisions in April for the new financial year, syndicate managers hoped they would once again turn to the Euromarket.

"Asian accounts have been the driving force behind the dollar and mark sectors for a long time. The question is whether they will return to dollars, marks or both," said one.

Dollar deals were likely to remain at the short end, whereas investors may start buying longer-dated marks again soon, dealers said.

"Continued volatility in the U.S. market is likely to dominate what happens in (dollar) Eurobonds, and we expect the yield curve to become flatter," said one new issues trader.

"We are still seeing a strong underlying bid for dollars, especially floaters. But there is a more sanguine attitude to fixed-rate dollar bonds. The retail bid is not unreasonable but likely to continue focusing on short end," he added.

In contrast, the mark yield curve is steep.

"The curve is so steep that it is only a matter of time before we see longer-dated deals," said a Frankfurt-based syndicate manager.

"No one has had a good time in the first quarter, so we do expect a bit more caution. But cash is building up, and redemptions remain high," said one trader.-Reuter