Severe widening could make dollar market unfeasible

Fri Oct 23, 2015 10:27am EDT
 
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By Abhinav Ramnarayan

LONDON, Oct 23 (IFR) - Public sector issuers this week priced US dollar bonds at spreads dramatically wider than they achieved in the summer, triggering worries that funding in the currency may become uneconomical if the trend continues.

European and American SSA issuers completed benchmark deals last week, but at a much higher cost relative to swaps than they managed earlier this year.

KfW, for example, printed a US$4bn 1.125% Nov 2018 Global at 17bp over mid-swaps - a far cry from the swaps plus 1bp pricing level of a US$6bn three-year it sold in early July.

"The asset swap valuations have widened in the second half of the year," said Klaus-Peter Eitel, vice president, new issues at the German agency. "This is putting a lot of pressure on all Libor-based issuers, but there's still a funding advantage versus three-year funding in euros."

The spread on KfW's three-year US dollar bond roughly translates to a funding level in the mid 20s below euro mid-swaps, according to IFR calculations. Eikon prices had KfW's euro-denominated 1.125% Oct 2018 bond trading at a swap spread of minus 20bp on Friday.

The question is if this advantage will last.

"The cost saving issuers used to benefit from has eroded at a very fast pace. Although for some issuers there is still a benefit I wouldn't be surprised if we see more euro issuance going forward," said Asif Sherani, a syndicate official at HSBC.

But an expensive US dollar market would be a blow to SSA issuers, who have come to rely on the currency this year in the face of a distorted euro market.   Continued...