Ok, so what?
One of the most frequent questions I get from people who are highly educated but devote themselves to something far away from finance concerns the use of the word “spread”. The way I’ve always thought of spread is that it’s the extra interest rate premium you have to pay for not being the richest guy in the room. In this case, each of these issuers is paying basically an extra 1 percent in interest for not being as creditworthy as the Japanese government. I’m not sure what else there is to say about this except that I would hesitate to declare the above spreads as evidence that investors are running toward emerging market samurai issues. Granted, the spreads are way lower than what they have been in years past for emerging market countries placing 5 year money, but at least as important to consider is that Japanese investors don’t exactly have many other investment options. Another way to say this is that this is a diversification play for both sides of the trade.
Finance, after all, is about relativity as much as it’s about wealth creation, capital formation, freedom, greed, math, politics or whatever else you think it’s about.
On some level, these issues do signify a level of investor confidence that hasn’t been so clear lately. But before we get too excited, let’s just bear in mind that Poland, Mexico and South Korea are among the top tier of emerging markets. There’s a lot of chatter about these issues, particularly the Mexican one, paving the way for other developing countries to follow suit, but I’ll believe that when I see it.
Regardless, having all this samurai activity coming so close together demonstrates that a segment of the global fixed income market which in recent years has wavered between erratic access and erratic terms appears to be re-opening. One of the biggest risks to issuing foreign currency debt is the foreign currency appreciating before the debt comes due. In this regard, issuing debt in yen is about the safest hard currency a developing country could borrow in at the moment considering that European investors kind of have bigger fish to fry and issuing in dollars right now might not be the most prudent thing to do.
Poland is clearly the most vulnerable as it a) has the smallest economy of the three, b) is right on the euro’s doorstep and c) is, like many other countries, experiencing slowing economic growth. Combined with the Polish government’s campaign to elevate Warsaw’s status as a financial hub, Poland has its work cut out for it, and the central bank’s ongoing interventions to prop up the zloty is evidence of this.
But for all three, the macro implication I draw from these issues is that this is a tactical move to hedge against ongoing contagion from the Eurozone crisis. One of the obvious attractions of samurai issues is that it diversifies a country’s investor base. Given the state of all things European, uneven home bias among US investors and a still-developing Panda/Dim Sum bond market in China, there aren’t too many other corners of the world to turn to, so yes, this is a pretty big deal.
As far as how much this adds to the increasingly rosy outlook everyone seems to have for Mexico, I’ll be picking up that topic in bits and pieces over the coming weeks, but the short answer for now is that Mexico has zero room for error.