Euro issues.

To paraphrase Churchill "Never in the field of EU bond buying has so much been expected to be bought by so few from so many."

The monstrously low EU rates have, to no surprise, triggered a glut of Euro issuances with another swathe hitting the wires.

Berkshire Hathaway
Ghana
Romania
Hosts of Chinese names

The effect on the Euro depends on how the proceeds are then handled. If they are to be used to fund Euro investments and paid off with euro returns then they self hedge . But if, as is the case with Berkshire and the majority of these, they are to be used to repay non EU debt load or to fund non EU investments then FX exposure opens up. Which can be then hedged or left exposed.

If they are fully hedged with FX swaps then currency risk is removed but so is the EU low yield advantage through the forward points. If it is partially hedged with rolling short date FX swaps then there is yield curve exposure and cash flow differentials on on each roll  date due to FX spot moves. If it is left unhedged then low rates are fully utilised at the cost of opening up FX risk. The risks of which are now being seen by emerging market countries who loaded up on USD debt and are now being squeezed by a strong USD and rising US rates.

But of course the EU is different isn’t it? The Euro is going to keep falling and rates are going to stay low forever. Basically the same arguments that were applied to the US two or three years ago. Hmmm.

As these bond issues pick up, the Euro will feel continued pressure in a self fulfilling way. Issue, sell the proceeds for which ever country currency they are needed in, see FX fall and feel justified to have left the FX exposure open. This is basically the ‘low yields mean currency falls’ mechanics from the debt issuance side rather than the ‘lower rates so won’t invest there’ investor side. Yet someone has to be buying these bonds and they will have to buy Euros to do so if they are non EU players. But the demand for EU based investment at stupid low yield is not so much coming from new overseas investors. It’s mostly ‘Have to be in Euro’ investors who are just looking for anything of good credit that is paying more than 0%, which results in portfolios switching along the curves of both duration and credit. Which means that local institutions, banks and pension funds have to buy the negative yield and take the pain or buy these new issues. Basically, I cant see the Euro being supported by a wave of overseas money arriving especially to buy these new Euro issues.

So it would no be a huge surprise to see Euro keep falling encouraging more to issue and keep the cycle going switching from Usd funding to Euro. Right up until all bases are loaded and rates are perceived to be going up again. So the best way of running your Euro bond issue is to run it unFX hedged until the Euro bases and then hedge as rates outlook change or the last issue is done. But that is a game of chicken watching the issuance calendar and being ready to hedge when the last player is in.

With all the Euro issuing going on I do wonder if the calculating minds of the structures and investment bankers have worked out a way to palm the stuff off into the whale shark grazing mouth of the ECB. As the ECB is allowed to buy covered bonds and ABS as part of its program, how much of this nonEU issued Euro debt will end up buried in ABS structures that end up in the ECBs vaults?They may well end up holding non-EU issued Euro debt via a complicated back door.

Meanwhile I also wonder exactly how legged over the ECB is going to get buying their bonds. The world has preloaded and anyone who has worked in a dealing room will know the drill when a CB calls up for a price. Very much like Gordon Brown and his gold sales.  Ok, I know that this is being done through e-platforms, but the moment the name is seen then the response will be the same. The cry goes out ‘ECB is in! Offers vanish and clients are sent messages along the lines of ‘ We are seeing very good demand right now from a good European, I said GOOD European, name’ and spec buying pushes things against them. Then the game of 'guess the amount they have done' kicks off and the guesses then correlated against price action in order to work out a rule of thumb guide to future price action, which will then be anticipated and so work less well going forward.

Unless of course there is a rerun of the apocryphal story from a 1990’s FX trading room.

Sales Guy - “USD/DEM in 10 for a bank please’
Spot trader “10/15”
Sales Guy - “Mine”
[Prices leap about 200points]
Spot trader - “WTF .. Who was that???"
Sales Guy - “Err.. Federal Reserve Bank"
Spot trader - “********* YOU ***ing MORON ******NEXT TIME THE FED IS IN ***** YELL IT OUT!  MINE MINE MINE MINE ’

2 weeks later
Sales Guy- ‘ Hi guys, Fed's in"
Spot Traders “MINE MINE MINE MINE’
[Price barely budges]
Spot trader - ‘Mate are you sure? WTF it’s offered! Who told you they are in?’
Sales Guy - ‘Reception, they just called up to say they are here for our meeting’
Spot trader - “**** *******  *** ******* MORON!! .. YOURS YOURS YOURS YOURS'