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Kangaroo bonds will become an increasingly attractive diversification play for Asian sovereigns, as USD funding becomes more expensive and the AUD weakens further.
Refinancing costs will rise for a majority of Asian governments as global demand for their bonds wanes ahead of rising US rates. Sovereigns in the region would do well to follow Indonesia and look at the arbitrage available in funding in currencies such as the AUD, where investor appetite remains strong.
Emerging market sovereign US dollar denominated debt has sold off since the US Federal Reserve indicated it could end quantitative easing by 2014. The Bloomberg USD Emerging Market Sovereign Bond Index is down 8.27% year-to-date, from 140.5 at the start of the year to 128.87 at the time of going to press.
In Asia ex-Japan, Indonesia has been the worst performer out of the 10 biggest economies. The sovereign issued US$1.5 billion worth of 10-year bonds to yield 3.5% in April. Since then, the yield has risen to 5.09%. Equally, 10 year local currency bond have risen by 263.6 basis points (bp) year-to-date, to reach 7.83%, according to data from the Asian Development Bank (ADB).
This could pose problems for the sovereign which needs to fund its largest budget deficit on record. Total bond issuance for 2013 is likely to be around IDR241.2 trillion (US$24.2 billion) up from the initial estimate of IDR180.4 trillion, according to Reuters.
The government plans to...