Frequent borrowers look to euros

WHEN THE EURO was introduced in January 2000, 10-year German swap spreads initially went as wide as –70 basis points before correcting; they have been simmering at around –5bp to –8bp ever since. Then, late last year, they began to widen again, reaching –23bp at the time of writing. Is this a short-term phenomenon, or the start of a fundamental shift in the cost of funding in euros?

Hans den Hoedt, global head of public sector debt at ABN Amro, sees a trend. “I think the widening of euro swap spreads is a longer-term phenomenon. They are 85% to 90% correlated to short-term ECB rates, which are on a rising trend. The other main factor affecting swap rates is the supply from sovereigns, and since most sovereigns will continue to push for lower deficits, this will make govvies richer and swap spreads therefore wider. In the short term, however, as...