The euro’s 12-year low against the dollar is a mixed blessing for US companies. On the one hand, the US manufacturing sector is suffering from an uncompetitive currency and lower export revenues. But on the other, rock bottom European interest rates have given US companies an attractive opportunity to issue bonds denominated in euros and lock in cheap financing. For example, in the first quarter of 2015 €27bn worth of “reverse yankee” bonds were issued by US corporates aiming to exploit low interest rates ahead of a potential interest rate hike by the FOMC later this year. Word on the street is that there is a backlog of issuance waiting to come to market should there be a resolution to the situation with Greece and its creditors.
Bond issuers aren’t the only ones that can take advantage of the trend to issue in euros. Given that many European government bonds have ultra-low interest rates by historical standards; bonds issued by US corporates have also become quite attractive for fixed income investors looking for higher yields. Those with a flexible investment strategy may therefore be able to exploit cross-market discrepancies across global corporate bond markets today.
In this edition of the M&G Panoramic Outlook, Wolfgang Bauer – deputy fund manager, gives his views on corporate bond valuations, explores historical changes in spread differentials between USD, EUR and GBP credit and explains how global fixed income investors can exploit attractive yield pick-up opportunities.