Mon, Nov 19, 2001 page24

• Corporate bond buying seen bolstering US dollar

  • BLOOMBERG
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  Foreign investors snapping up US corporate bonds have boosted demand for dollars this year, and a spate of corporate debt sales in recent weeks is expected to further buoy the currency.

  US companies are taking advantage of lower borrowing costs after the Federal Reserve cut interest rates four-and-a-half percentage points this year. AT&T Corp sold US$10.1 billion in debt Thursday, twice the amount initially planned and the second-biggest bond sale by a US company.

  "There is still demand from global investors, especially within Europe, to purchase corporate debt" from the US, said Murray Gunn, foreign exchange investment director at Standard Life Investments in Edinburgh, Scotland, where he helps manage ?78 billion (US$114 billion). That's bringing more money into the US, "so this would be a positive thing for the dollar."

  The dollar had its best week in seven against the yen, reaching ?122.93. That's its highest level since the week of Oct. 26, when a record US$30.3 billion in US corporate debt was issued. The dollar strengthened 1.1 percent to US$0.8843 per euro, after touching a three-month high of US$0.8773 Wednesday.

  Three of the Fed's 10 rate reductions this year came after Sept. 11, when terrorist attacks in New York and Washington worsened an economic slowdown that had already started. That helped push the benchmark 10-year Treasury note's yield, now 4.84 percent, as low as 4.178 percent on Nov. 7.

  Concern that the slower growth would hurt earnings helped widen the difference in yield between 10-year Treasury and corporate debt 25 basis points in the past six months.

  Bonds of "A"-rated companies yield 6.79 percent on average, 2.05 percentage points more than 10-year Treasuries, according to Merrill Lynch & Co. Corporate bonds yield 5.44 percentage points more than 10-year Japan-ese government bonds and 2.24 percentage points more than 10-year German bonds.

  "Foreign investors are attracted by the wide spreads of US corporates over Treasuries" as well as over foreign debt, said John Lonski, chief economist at Moody's Investors Service.

  Although the spreads "have narrowed somewhat since then, they're still wide on a historical basis."

  Even in the year's first half, when the spreads were narrower, a corporate bond buying spree by foreigners helped drive the dollar up 11 percent against the euro and 9 percent against the yen. The amount of outstanding US corporate debt held by foreign investors rose US$69.9 billion in the second quarter, after a record US$70.1 billion increase in the first quarter.

  "Unprecedented foreign net purchases of US corporate bonds are in play here," said Lonski. "Because of a considerable increase in economic uncertainty and the terrorism threat, we probably did not see as much net buying by foreigners as in the first half of this year" for the July through September period, though it is picking up again, he said.

  While lower interest rates have typically been seen as weak-ening currencies, that traditional relationship is less important now, analysts said. Returns on three-month US dollar deposits are 1.25 percentage points below those in euros, a gap 38 basis points wider than the six-month average.

  "Investors are looking to the return on long-term securities, as opposed to what short-term deposits are going to give you," said Sean Callow, a currency analyst at IDEAglobal.com. "So the question is, are US assets going to outperform Europe and Japan over a longer time horizon?" The belief that they will is helping the dollar, he said.

  This year's Fed rate cuts and expectations for as much as US$100 billion in government stimulus spending have fueled expectations the economy will start growing again early next year.

  By contrast, the International Monetary Fund forecast Thursday that Japan's economy will shrink 0.9 percent this year and 1.3 percent next year.

  Economists also expect that with just four interest-rate reductions by the European Central Bank this year, the 12-nation euro economy will take longer than the US to rebound.

  Still, the impetus to issue corporate debt will wane as evidence mounts that US growth is picking up, investors said.

  That may limit the dollar's gains from foreign bond buyers next year.
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