An attractive rate for issuers swapping back to euros is set to make dollars a go-to market for SSAs in 2015. And dollars holds the added benefit of higher yields than those on offer in euros.
But it will also be more vulnerable to volatility as the Federal Reserve looks to raise rates. So borrowers will need to pick their issuance windows carefully — and ensure that deals are priced sensibly — to avoid benchmarks turning into bellyflops.
Dollar deals have always carried higher execution risk than euros because of the less granular nature of the investor base. They could be even trickier next year as investors hang on to every word, move and facial expression of Federal Reserve chair Janet Yellen to gauge when a rate rise may come. If the market is wrong-footed, it could cause havoc in capital markets.
One of the problems is that the central banks have been on a one way street for years — low rates for long — and that has led to a build-up of big consensus positions.
Disappointing US retail data was one of the reasons behind a very large swing in US Treasuries on October 15, as large numbers of investors reversed their position on where US rates were going, causing a 30bp rally in the 10 year US Treasury intra-day. That volatility made dollar issuance tricky in the following weeks.
When Ben Bernanke first mentioned the prospect of tapering the Federal Reserve’s quantitative easing programme in May 2013 the dollar market was shut to SSA issuance for weeks afterwards.
Dollar issuance was exceptionally strong in the latter half of 2014 — issuers were able to print oversubscribed deals offering minimal new issue premia, and few deals failed to hit subscription. Those conditions will be there at some points in 2015, but issuers need to be on top of their game to hit those funding windows.