Randomly Noted

In my travels around Asia the past couple of weeks, I’ve been meeting with various banks and investors to learn more about the FX market in connection with our big initiative there. Stopped in to see a decent sized U.S. hedge fund and was fascinated by the investment strategy.

Among other tings, these folks invest in convertible bonds issued in local currencies in home countries. They end up with three factors that can affect returns: credit exposure, changes in interest rates and changes in currency values. The manager relayed an interesting anecdote that explained the benefit of such a strategy: the bond and underlying stock hadn’t moved much in price but the currency had to the point it allowed him to convert the bonds into stock and then sell the stock, convert the currency to dollars and make a handsome return. In other words, currency fluctuations in transactions like this can help take an out-of-the-money convertible and all of a sudden bring it in the money.

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My colleague Ditas Lopez has been chronicling a significant surge in Asian companies raising money in the bond market. Borrowers in Asia-Pacific will aim to refinance about $550 billion in bonds and loans this year and next, Ditas writes, citing a Citigroup executive. She notes that the just-ended first quarter was extremely busy, as South Korean companies in particular issued a stream of bonds denominated in USD, JPY and EUR. What’s going on is a confluence of companies needing to refinance bonds – certainly the case in South Korea – and an increase in confidence among bond buyers.

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