European Credit Investors Hit By Currency Hedges, EU Political Concerns

With the US dollar rocketing higher, a Bank of America Merrill Lynch report, with an eye on foreign credit investors, claims the “year-end could not have come at a worse time.” Dollar hedges have been particularly hard hit, but looking across the European panoply of issues for 2017, the bank sees “all change” as the mantra as political concerns are shading credit investors holiday thoughts.

Curency hedges used by credit investors could benefit from a "January effect"
With currency dealers reducing balance sheets for regulatory purposes, foreign demand for US dollars are competing for an increasingly “scarce” commodity, making US credit investments less attractive.

The majority of overseas investors with exposure to US credit use a hedging strategy where they roll short term (1-month or 3-month) currency hedges. This means they are “forced to pay up” when dollar funding costs spike.

BAML analyst Hans MIkkelsen noted that 3-month hedges modestly impacted by hedging issues in September, but “there was a huge 100bps spike in the cost of 1-month hedges – from about 140bps to 240bps annualized - heading into December” impacting shorter term hedgers.


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