The BIS’ Deliberate Debt Composition Unraveling

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The Bank for International Settlements, in its latest quarterly survey of cross-border banking and bond flows, unveiled a deeper statistical set covering euro and yen-denominated activity and a recent profile of emerging market government patterns in two dozen countries. The amount doubled the past decade to almost $12 trillion, with China and India accounting for three-quarters. Composition “changed significantly” with 80 percent through local and international bonds compared with 60 percent fifteen years ago, and concentrated in the former at fixed rates and longer maturities. The foreign currency share halved over the period to 15 percent, and the dollar’s portion was 75 percent. International issues comprised one-third of outstanding official securities in Saudi Arabia, Turkey, Indonesia and Poland, and Mexico is the top issuer overall with almost $70 billion placed over several decades. With few exceptions like Argentina, where over half of Treasuries are dollar-quoted, this structure has progressively faded as Turkey for example redeemed the remaining stock five years ago.  Maturity has “risen sharply” and is just below the advanced economy 8-year average, with South Africa’s the longest at 16 years, outpacing the US, Australia, Germany and Canada. The fixed-return slice in turn jumped to 75 percent from 60 percent in 2000, in contrast with the industrial world’s 90-95 percent standard. Malaysia, Taiwan and Thailand issue only this type, and Chile’s fraction of the total quadrupled to 40 percent since 2005. Inflation indexing has also taken off in Latin America in particular, and is one-third of Brazil’s local debt. The BIS concludes that currency mismatch and rollover risks are reduced to aid sustainability, with the caveat that longer duration could now further erode market value with future global interest rate rises.

The quarterly roundup tracked less than 5% increases in cross-border bank claims and debt placement worldwide, with dollar credit to developing country borrowers at $3.5 trillion at end-March.  Middle East and Africa oil exporters got another $60 billion and Asia and Latin America $40 and $20 billion respectively, while Europe allocation fell $25 billion. Credit above GDP growth trends signal alarm in China and Hong Kong, although debt service ratios remain manageable, according to the report.  Industry association EMTA’s Q2 trading volume tally came out at the same time, with a 15 percent annual and quarterly decrease to $1.1 trillion attributed to greater passive ETF inflows. Local instruments were over 55%, with Brazil, Mexico, South Africa, China and India the favorites.  Eurobond action was close to $500 billion, again with Brazil at the top followed by Argentina.  CDS turnover not yet in the ETF frame was also down 9% to $260 billion. With domestic bond market opening Chinese assets now account for almost one-tenth of activity, helping to offset uncertainty in other asset classes like private equity which has noticeably slackened since 2015, according to a September Preqin study.  Only forty funds worth under $10 billion have closed year to date, with deal value at $35 billion. It casts a shadow on the region as the biggest market, but two-thirds of fund managers polled expect to deploy more capital over the coming year, despite exit and valuation concerns that can decompose the landscape.