Cross Currency Opportunities: EUR Spreads To Outperform USD Counterparts

We expect USD spreads to underperform against EUR in 2021. Alongside this, we expect the cross-currency basis swap and 3m vs 6m roll to remain tight. In combination, this will offer a cost-saving advantage for US corporates to issue in EUR and swap back to USD. We forecast corporate Reverse Yankee supply to reach €80bn.

Corporate credit and Reverse Yankee supply implications

Following on from our report 'Cross Currency Swap Decomposition A rationale for swapping from USD into EUR', which you may be able to access here (under Developed Rates Strategy), we take a look at what this means for corporate credit and Reverse Yankee supply. As stated in the previous report, we find that swapping from USD to EUR is becoming more attractive in light of the widening of the spread in recent months. It will likely move wider, but even at current levels, there is an opportunity to get cheaper funding.

As seen in the two charts below, the cross-currency basis swap and the 3m vs 6m roll have tightened significantly. Furthermore, in the 10yr area, the USD EUR spread differential is notably wide. The 5yr spread differential on the other hand is significantly tight. At current levels, the long end of the curve offers an attractive cost-saving opportunity for US corporates to issue in EUR.

Cross-currency basis swap 5yr & EUR USD spread differential 5yr

Source: ING, ICE, Refinitiv

Cross-currency basis swap 10yr & EUR USD spread differential 10yr

Source: ING, ICE, Refinitiv 

Examples indicate a similar picture

The table below illustrates the cost or saving for both European and US issuers to swap. As you can see, the 10yr+ area is very advantageous for US issuers to issue a EUR bond. Whereas the opposite can be said, but not to the full extent, for European corporates issuing in USD. As mentioned we expect the entire USD curve to underperform versus EUR  and as a result, we will likely see the 5yr area also open up a cost-saving advantage for US corporates. However, this then eliminates any of the marginal cost saving seen for European corporates issuing in USD. 

Swapping into home currency (bp)

Source: ING 

EUR spreads will outperform USD as ECB support remains across the curve

In 2021 we expect to see USD spreads underperform against EUR across the curve. Therefore, we will likely see the 5yr USD EUR spread differential also widen. USD curves have been particularly steep as a result of the short end limitation of the Fed support. The recent underperformance of USD is highlighted by the fact that the USD EUR spread differential is widening in the 5yr area of the curve, the exact area where both the US Federal Reserve and the European Central Bank were active. Naturally, the differential is much wider in the 10yr area where the FED was not directly purchasing. The cost-saving advantage in the 10yr is significantly higher and although these are indexed averages we can assume a funding advantage for almost all US corporates. Consequently, the majority of Reverse Yankee supply will be longer-dated bonds.

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Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information ...

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