Reverse Yankees fall on rising costs for US issuers

The number of American companies tapping Europe’s bond markets has fallen this year with rising relative borrowing costs on the continent weakening the case for cross-border debt.

An extended rally in European credit has enticed US companies to borrow over €100bn of so-called “reverse Yankee” bonds over the past two years with corporate bond purchases from the European Central Bank driving down yields.

But appetite is fading — so far this year, there have been just €2.5bn of reverse Yankees sold in Europe compared with more than €10bn at this stage in 2016, data from Deutsche Bank and Bond Radar show.

“It’s no longer obvious for a generic issuer that euros offer a cheaper cost of funding than dollars,” said Zoso Davies, a credit strategist at Barclays. “If you’re an issuer, why would you choose to take more expensive funding?”

The shift highlights the extent to which corporate bond issuers have become sensitive to political and monetary conditions in different geographical regions.

Europe’s corporate bonds have underperformed their US counterparts since November, raising relative borrowing costs.

The election of Donald Trump is seen as a positive for US credit markets while a reduction of ECB purchases this April has prompted speculation on the impact on corporate bonds.

Yields on corporate bonds are typically measured as a spread over low-risk government bonds of the equivalent maturity. The credit spreads on a major index for US bonds dipped below their European equivalents at the end of December, for the first time since the summer of 2015. They are now at their lowest level in more than two years.

Analyst at JPMorgan this week estimated that it is currently 6 basis points cheaper to issue a bond in dollars than in euros, after the costs of hedging are accounted for. Last October, by contrast, it was 15 basis points cheaper in euros.

Bond issuance got off to a breakneck start to the year in the US with investors piling into higher risk products.

European investors, many of whom are wary of emerging political risks on the continent, anticipate positive effects for corporate credit under a Trump presidency.

“At the moment, we’re favouring the US from an investment grade standpoint,” said Iain Stealey, a portfolio manager at JPMorgan Asset Management.

At the moment, we’re favouring the US from an investment grade standpoint

“We would argue that what the Trump administration does for the US is just fantastic for corporates. The market perception is fiscal spending, tax reforms — this is all good for corporate America,” he added.

So-called “Yankee” bonds, where European companies sell bonds in the US, have got off to a faster start to the year than reverse Yankees with €14bn of issuance so far, according to Deutsche Bank data.

Some analysts suggested that future changes to government or monetary policy in the US compared with Europe could again transform incentives for companies to issue in foreign markets.

“The reality is the world is so global these days,” said Mr Stealey. “What corporates will do is they will issue where is most efficient for them.”