Foreign Currency Bonds

Every so often, a pundit or economist will put forward the idea that the US may chose or have to issue foreign currency bonds. It is understood as a sign of weakness. And yet few have noted that that the Swiss National Bank, whose country enjoys among the the largest current account surpluses among the advanced industrialized countries has issued US dollar bills this year.

Last week, Spain and Belgium together issued about $3.5 bln in 3-year notes. Spain's $2.5 bln issue was priced about 18 bp above mid-swap rates. Today Germany is putting the final touches on its own dollar issue, the first in four years. The book closing and pricing are expected to take place today and settlement for next Monday. It looks to be priced around 25 bp below mid-swaps rate. Indications from market makers is that it is being well received.

The German government justified its dollar offering on grounds that it would produce savings. Barron's Current Yield column argues that the 7 bp spread between US and German 3-year instruments were trivial and that the real savings would likely come from the currency side. Really?

First the German government is most likely to swap the dollars into euros, eliminating the currency risk and potential to profit on dollar depreciation. no betting that the dollar continues to decline as Barron's suggests. Second, The savings looks to closer to 10 bp, which on $4 bln over three years is $12 mln risk free. Third, the German government is raising nearly 350 bln euros of debt this year. It has already had an auction that was under-subscribed (failed) and a dollar issue would broaden its likely investor base.

Ironically, these dollar issues by Germany, Belgium and Spain, coupled with a number of European corporate dollar offerings, take place at the same time, of course, that the US Treasury supply is nearly non-stop and corporate America has been very active as well. The dollar-denominated bond market appears to have thus far absorbed the huge supply relatively smoothly.

The market is regarding the raising of foreign currency debt by three euro zone members and Switzerland markedly different than it would likely respond to the US issuing euro or Swiss franc denominated debt. Rather than be a sign pending dollar weakness as Barron's claimed, we suspect it is more about the desire to broaden the investor base and make marginal cost savings.