Global US dollar funding shortage back on radar

NEW YORK: Signs of global dollar-funding pressures are bubbling up in currency derivatives, making it costlier for international investors to protect against swings in the greenback when they buy US debt.

Cross-currency basis swaps, which money managers and corporate treasurers outside the US can use to borrow in dollars, remain close to the widest levels since January even after quarter-end, when such financing strains typically dissipate.

The market was a key indicator of stress during the financial crisis, and while it is nowhere near the alarming levels of that era, it is still garnering the attention of analysts.

There are several forces at work that are raising the expense of financing in dollars. Strategists cite the political tension in Spain related to Catalonia’s independence push and the slow pace of Brexit talks, which may be heightening the perception of credit risk for the region’s banks. That combines with the prospect that a US tax overhaul could trigger dollar repatriation.

And there’s also the outlook for monetary-policy divergence, with the Federal Reserve starting to unwind its balance sheet, and analysts see the trend only worsening.

“This is keeping a lot of people feeling uneasy,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities in New York. “This now seems more of a political story, with Catalonia, UK Brexit negotiations and potential US tax reform and repatriation. Spreads could keep widening.”

Investors and companies use the swaps to exchange foreign-currency funding into loans denominated in dollars. As the spread becomes more negative, it swells the premium for procuring dollar financing.

While Republican efforts to get a tax plan through the Senate may be off to a rocky start, any framework that spurs US companies to repatriate cash could compound the scramble for dollar financing.

Although that is probably a story that would play out in the second quarter, it may already be factoring into expectations, Goldberg said.

There’s another reason the strain is set to grow. The Fed is set to boost the pace of its balance-sheet roll off each quarter, potentially putting upward pressure on US rates relative to Europe and making it tougher for global investors to get dollar funding, according to Mark Cabana, head of US short rates strategy at Bank of America Corp. — Bloomberg