Dollar Top or Trouble Brewing
The bull market in the U.S. dollar was accompanied by falling U.S. dollar bond sales in emerging markets. This reversed in the first third of 2017, with USD-denominated bond sales climbing 270 percent.
When USD credit growth stops slowing and begins rising, that is a sign the top in the dollar is in.
The deluge of issuance began when companies anticipating a surge in borrowing costs amid economic stimulus from Trump rushed to sell notes before his inauguration Jan. 20. But the expected jump never materialized, extending the window for companies like Petroleo Brasileiro SA and Petroleos Mexicanos to pursue multi-billion-dollar deals. They found plenty of demand from investors keen to buy shorter-dated debt that’s better insulated against rising U.S. interest rates.
Shorter-dated debt scream maturity mismatch.
Developing nations now rely less on exporting their goods to the U.S. and more on local consumption than in previous says, said Samy Muaddi, a Baltimore-based money manager at T. Rowe Price Group Inc., which oversees $862 billion.
Then why don’t they borrow in local currency?
Debt from Indonesia, Argentina and Brazil is particularly attractive as those countries implement economic reforms, Muaddi said. While Trump’s trade policies may be bad news for Mexican companies if he scraps the North American Free Trade Agreement, he said many of the world’s biggest geopolitical risks are in developed markets — think Britain’s negotiations to leave the European Union or France’s election outcome. That’s upending the usual dynamic in which emerging markets are considered less stable.
Risks still remain. A surge in the greenback could spell bad news for emerging-market companies with lots of dollar debt and revenue mostly in a local currency. The overseas debt binge has boosted their total foreign corporate debt due in the next five years to $1.58 trillion, according to the Institute of International Finance. About 80 percent of that is dollar denominated.
I am betting on bad news.