In the first two weeks of the year 54 yankee bonds were issued by banks, raising more than $36 billion more than the entire 2010 issuance, according to Dealogic. More deals are expected in February. European banks such as Lloyds TSB, Barclays, Nordea, BNP Paribas, Barclays and Crédit Agricole all turned to the US to raise money. Rabobank Nederland sold $2.75 billion in yankee bonds.
The deluge of issuance is in part a result of the negative euro-dollar basis swap.
Jeff Meli and Bradley Rogoff, credit analysts at Barclays Capital in New York, explained the situation in a January report.
"A negative basis swap spread benefits the European issuer by lowering its effective cost of funding relative to issuing directly in the EUR market," they wrote. "Currently, the five-year USD-EUR basis swap spread is 26bp. This means that a European bank needing five-year EUR funding can pay 26bp less (Euribor plus the negative 26bp five-year basis swap spread) for EUR funding by issuing a USD bond and entering a cross-currency basis swap, compared with issuing a EUR-denominated bond directly (in which it would be required to pay Euribor)."
Negative EUR/USD basis swap boosts Yankee bonds
Five-year basis swap
Source: Barclays Capital
US investor appetite has also been driving issuance. European investors are more risk averse than their US counterparts when it comes to investing in European banks. A syndicate official in New York says: "The sovereign risk factor is greater in Europe than in the US. Some US investors are just are not aware of the risks, and some seem to have just shrugged off concerns."
Dan Mead, a managing director in investment-grade syndicate at Bank of America Merrill Lynch, says the investor base in the US is suitable for European banks issuing in dollars. "Historically the banks have been large investors in other European banks. We expect the banks to be less involved as investors going forward, whereas in the US the investor base is composed primarily of money managers, insurance companies and pension funds."
"The way US investors are lapping up European bank debt is reminiscent of how unwitting Norwegian municipalities were buying US mortgage-backed bonds before the crisis"
Peter Atwater, Financial Insyghts
But should US investors take the risk aversion of European investors as a warning? Peter Atwater, a former head of asset finance at JPMorgan investment bank, and now president and chief executive of consulting firm Financial Insyghts, thinks they should. "The way US investors are lapping up European bank debt is reminiscent of how unwitting Norwegian municipalities were buying US mortgage-backed bonds before the crisis. US investors are relatively unaware of the real risks facing the European banks. They are desperate for yield, and they recognize the name of some of these banks, or hear that they are the biggest banks in their country of origin and so dive in."
Atwater says investors should be questioning why European banks are suddenly issuing vast amounts of yankee bonds. "It seems that European banks have very few domestic alternatives left for raising long-term debt something regulators are demanding in the aftermath of the near run on Irelands banks. Local appetite for unsecured debt is drying up as there has been growing apprehension on the part of European regulators and politicians about bailing out creditors of the banks. While sovereign risk still looms over Europe, US investors might want to assert greater caution."
Issuance is unlikely to subside, however. European banks need to refinance some 935 billion of debt that is falling due over the next three years.
Anne Daley, a managing director in fixed-income syndicate at Barclays Capital, says she expects issuance to slow down over the beginning of February before ramping up later in the year. "If you ask European banks what their financing currency of choice is they would be slightly skewed towards the euro versus the US dollar, but, depending on how market conditions play out, the US is presently a better place to raise capital."
It is not only European banks, however, that are turning to the yankee bond market. Japanese, Canadian, Australian and Latin America banks have also been active. ANZ priced $3 billion in bonds in the first two weeks of the year. Sumitomo Mitsubishi came with a $1.5 billion offering. Among other foreign bank issuers were Bank of Nova Scotia, RBC, Macquarie Group and Banco Bradesco.