Corporate Financing Analysis - Record Run For 'Reverse Yankee' Bonds To Continue - 18 DEC 2017


Corporate America's hunger for cash, together with the sustained period of record low interest rates in the Eurozone, have combined to create an increasingly favourable climate for so-called 'reverse yankee' bonds. As a result, 2017 is well poised to close as a record year for corporate debt sold overseas in currencies other than US dollars by firms domiciled in the US, with Europe playing host to the bulk of issuance. Such a 'perfect storm' for yankee bond deals cannot, however, continue to push activity in the market indefinitely higher; rather, the success of activity in the market is intrinsically linked to Eurozone interest rates, and subsequently how cheap it is for US companies to price debt overseas rather than at home. But for now, BMI notes that the 'reverse yankee' market remains in a strong position. The European Central Bank (ECB)'s tapering announcement following its October 26 meeting points the way to a gradual exit from extraordinary accommodation, but we continue to believe that policy will remain very easy for several more years. As such, the core view of BMI's Global team remains that the ECB will continue expanding its balance sheet into 2019 and will keep its benchmark interest rates on hold until 2020, a policy mix that will keep the euro on the back foot against the US dollar and keep the market for reverse yankee bond deals very much alive with activity.

The ECB ' s Dovish Taper

At its late-October meeting, the ECB decided to keep rates on hold (deposit rate at -0.40%, main refinancing rate at 0.00%, marginal lending rate at 0.25%) but did, however, announce a reduction in the pace of its monthly net asset purchases from EUR60bn to EUR30bn, beginning in January 2018 and lasting through at least the end of September 2018. This was broadly in line with market expectations and our view that ECB asset purchases are likely to continue through to the end of 2018, albeit at a slower pace than what has been witnessed across the past couple of years. To the extent that an announcement to slow asset purchases can be considered dovish, this one certainly was, with President Mario Draghi emphasising in the post-meeting press conference that the ECB stood ready to expand policy should inflation continue to run under the 2.0% target over the medium term. More broadly, BMI's core views on Eurozone monetary policy are largely unchanged by the announcement. To put this into the context of what is fuelling yankee bond activity, it is our view that the ECB's dovish stance continues to diverge with that of the US. Indeed, while the ECB's strategy has not shifted greatly, and continues to support the quantitative easing (QE) process, the US Federal Reserve began reducing the size of its balance sheet in October and is set to deliver at least another 100bps of policy rate increases by the end of 2019, in addition to the 100bps already enacted since 2015. Focusing in on the ECB's ongoing asset purchasing programme, the October announcement implies a similar scale of total purchases to our expectations (EUR270bn versus our EUR240bn, with the balance sheet already at EUR4.3trn in early October). Moreover, the announcement only further underlines that the ECB will continue to buy assets through the end of the year and probably into 2019.

Growing In Favour
Y-T-D Global 'Reverse Yankee' Bond Issuance, By Deal Value, USDmn
Source: BMI, Bloomberg

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