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Basis-swap costs get less onerous for US issuers

Although deeper and more liquid than anyone had dared predict, the nascent euro-denominated bond market in 1999 had one weakness: it was failing to secure may US issuers. However, during the first eight months of this year the costs of issuing in euros narrowed for a great many US borrowers, and increasing numbers of them began to recognize the attraction of the euro market.

The prospect of investor diversification beyond the traditional base was always an attractive one for American end-users. Moreover, the cost of borrowing in the euro market is generally lower than in the domestic dollar market. But these advantages were not sufficient to overcome one big disadvantage for US borrowers that needed dollars as an end currency: the cost of the basis swap from euros to dollars.

The cost of swapping from five-year floating euro exposure to floating dollar exposure currently costs the borrower up to 4 basis points; at 10 years it is 4.25bp. In the early days of the euro-denominated bond market, this cost was even more prohibitive and ran to 6bp or 7bp at 10 years. "The basis-swap cost did put a lot of people off," agrees Paul Richardson, treasurer of scientific publishing house Reed Elsevier.

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