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. Last Updated: 07/27/2016

NEWS ANALYSIS: Dollars Dominate 2000 Bond Issues




LONDON -- The U.S. dollar has taken an early lead in this year's bond issuance tables after being eclipsed by the euro in 1999, but is unlikely to maintain its current dominance for long, analysts said.


They blamed poor arbitrage and interest rate uncertainty for the single currency's subdued early showing, but said Tuesday that continued corporate restructuring activity in Europe should open the way for a rush of euro issuance later this quarter.


"There is a degree of uncertainty. Bonds have sold off sharply in Europe and investors won't want to be piling in until the rise in yields has stabilized," said Graham Bishop, adviser on European financial affairs at U.S. investment bank Salomon Smith Barney. "It's not [a situation] conducive to massive issuing volumes."


Bishop noted the poor response seen to Jan. 5's auction by the German government of new 10-year Bunds, which followed a sharp upwards spike in yields. Strong recent euro-zone economic data have shaken investors, who now anticipate an early rise in interest rates by the European Central Bank.


A further U.S. interest rise is also expected, but bond buyers appear to be more sanguine about the prospect at this stage in the economic cycle.


The euro was the favored fund-raising currency in the international bond market last year, beating the dollar into second place for the first time. However, new issuance to date in 2000 has been heavily skewed towards the dollar. According to industry tracker Capital Data, some $19.4 billion of new dollar bonds have been launched, versus just $8.5 billion in euros.


Virtually all this year's early benchmark issues have been dollar-denominated, including a clutch of high-profile deals offered for sale over the Internet by heavyweight borrowers such as U.S. agency Freddie Mac and the World Bank.


Euro issuance meanwhile has consisted mostly of smallish increases to existing transactions.


Supply of dollar bonds has been matched by demand, as investors who held cash over the millennium turn to protect against possible liquidity problems scramble to put their money to work.


"The credit markets are on fire. We've seen relentless buying since late November, when Y2K worries began to ease," sad the head of syndicate at a German bank in London.


"There is a lot of U.S. money in the market and international demand for dollar paper too."


Analysts cited several other factors to explain the dollar's stronger performance in the primary market this year.


Chief among them was the lack of arbitrage in euros. Already-tight euro swap spreads have ratcheted in further as government bond yields have risen, and failed to widen in line with U.S. swap spreads during the last few days.


"There is good demand for euros but it's a question of trying to make the numbers work," said a syndicate executive at a U.S. bank in London.


The swap spread indicates the rough cost of borrowing for a double-A rated corporate. An arbitrage window opens when the swap spread widens relative to spreads on bonds trading in the secondary market.


The higher absolute yield offered by dollar bonds gives another reason to buy them, said Andre de Silva, senior bond strategist at ING Barings in London.


"The yield premium to euros has been in place for the last quarter, so it's not new. As soon as we see a rewidening of swaps and some yield stability [in euros] it will be back to the market for borrowers and investors," de Silva added.