Global Investing

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.

Healthy flows into money market funds

Despite concerns about contagion from the euro zone, investors injected fresh funds into U.S. mutual funds, including money market funds, latest weekly flow data from Lipper shows.

The week ended Nov 16 saw a net $10 billion inflow into mutual funds, including ETFs, while investors were net buyers of equity funds with flows at $2.8 billion. Equity funds, including ETFs, witnessed their fifth consecutive week of net inflows.

Reflecting jitters over the debt crisis however, investors injected $2.8 billion into taxable fixed income funds and for the second week in a row bought into money market funds to the tune of $2.9 billion.