Cross Currency Swaps: So Easy, No more

International buyers own about $3.6 trillion of U.S. company borrowings, marking a $600 billion increase in the past two years.

Cross-currency basis swaps are widely used by money managers and corporate treasurers to borrow the dollar, has come close to widest levels since January’17 even though it’s the quarter end when such pressures usually disappear.

There are multiple factors which are causing this borrowing to get more expensive:

•  Currently, the slow pace at which the Brexit talks are happening combined with the political tension in Spain regarding the Catalonia’s push for independence has heightened the perception of credit risk in these region’s banks.
• The trend is only expected to worsen as US rate hike gets closer along with the Federal Reserve starting to unwind the balance sheet. The prospect that the US tax restructure could also trigger dollar repatriation also plays a major role.

As the spread becomes more negative, it swells the premium for procuring dollar financing.

Initially, for the euro investors, taking dollar credit was the most obvious thing to do was but now the situation isn’t the same leading them to take on more duration and credit risk to juice returns.

The rising dollar funding cost will be another factor for the investors to pull out their money from the EM’s especially at the quarter- and year-end as banks will make sure to have sufficient supply of dollars to spruce up their balance sheets.