As has been duly noted by analysts, newspapers and commentators in the last few weeks — the dollar is emerging as the world’s new favourite ‘carry-trade’ currency. (Although, some have suggested it should really be the Great British Kroner.)
With that in mind, we’ve noticed a large number of non-traditional denominations of bond issues coming to market across the world.
As the FT noted last week, Germany became the latest sovereign to tap the market for dollars when it issued only its second foreign-currency bond since the second world war. That followed in the footsteps of Spain and Belgium, which issued $3.5bn of dollar-denominated paper the week before. Austria, meanwhile, accompanied its first issue since 2005 — a $1.5bn bond — with comments to the effect that it would consider another dollar-denominated bond if conditions were right.
The Swiss National Bank has been issuing dollar-denominated paper since February this year.
Part of the dollar-denominated bond frenzy, of course, can be explained by a dire need for dollars in respective issuer countries. That was certainly the case for the SNB, which needed dollars to support the toxic assets it took on via UBS. Part of it can also be put down to fears of a crowding-out effect due to record issuance and the hopes of attracting foreign buyers.
But another part, according to bankers, is the very real perception that dollar-denominated debt will be much cheaper to pay back. In effect, one gigantic dollar weakness play.
As the FT reported:
Bankers say a drop in the cost of switching back into euros from the US currency has added to the appeal of issuing in dollars for European governments. European financial institutions and corporates have stepped up their demand for dollars in the past year as they seek to pay dollar loans and repair balance sheets.And the Europeans wouldn’t be the first. Russian institutions, for example, caught onto the dollar issuing trend from as early as the second quarter of the year.
Emerging market corporates, its seems, have also been steadily catching on throughout the year.
And then there are countries like Poland, so desperate to plug their budget gap next year, they’re considering almost any denomination for future issues. As Bloomberg reported on Monday:
Poland said it may sell bonds denominated in euros in October to help finance next year’s budget needs following the thaw in global financial markets.
The government sold 1.75 billion euros ($2.6 billion) in bonds starting in February, the first offering since June 2008, after the global financial crisis seized credit markets. It raised $3.5 billion in July in the first dollar-bond offering since 2005 and last month announced the sale of 750 million Swiss francs ($722 million) worth of bonds, according to Bloomberg data. The Finance Ministry said last week it may also offer yen- denominated bonds in November.
The big question is — are we in line for some major sterling-denominated issuance in the months to come as the UK carry-trade catches on?
Related links:
European government bonds on a roll – FT Alphaville
Russia’s win win - FT Alphaville
Does a single European bond hold the answer? – FT Alphaville