Funding stress in the FX swap market
Signs of the wholesale funding stress are cropping up in the FX swaps market, with the premium for swapping euro LIBOR into dollar LIBOR over 3 months (so-called cross currency swap) rising to 141.5 basis points, which is the post-Lehman Brothers high.
The premium has skyrocketed in the past six months (back in May it was only 16.5bps) because European banks needing funds are forced to turn to the FX swap market, and other banks are reluctant to lend to European companies in the United States.
And it looks like the situation is going to get worse from here, because of weak dollar bond issuance by euro zone companies.
JP Morgan says companies across the euro zone are not issuing very much — the average issuance over the past two months stands at only $1.3 bln, compared with a $4.5bln per week pace seen over the first half of the year, when dollar funding conditions were less stressed.
“The fact that dollar issuance is so subdued even for euro area non-financials is worrying as it suggests investors do not differentiate between euro area issuers. This is reinforced by the fact that dollar issuance by European companies outside the euro area appears relatively unaffected,” JP Morgan writes.
The $2.2bn per week pace of dollar debt issuance by UK, Swiss and Scandinavian companies in H2 is only slightly lower than the $3bn weekly average seen in H1, JP Morgan says.