ADVERTISEMENT

Euro Loses Some of Its Charm for Emerging-Market Borrowers

Euro Loses Some of Its Charm for Emerging-Market Borrowers

(Bloomberg) -- The April revival in emerging-market bond prices has left one group disappointed: euro borrowers.

Debt denominated in the shared currency are lagging behind a rally in dollar bonds, according to Bloomberg Barclays gauges. That’s narrowing the yield gap between the two at the fastest pace since 2011, eroding the advantage for developing nations from borrowing in the euro rather than the U.S. currency.

Euro Loses Some of Its Charm for Emerging-Market Borrowers

That’s a reversal of last month’s trend at the height of a dollar-funding squeeze, when the relative cost of borrowing in euros had fallen to a record low despite an increase in nominal yields. That had made owning debt in the single currency a safer way for investors to ride out the turbulence.

Euro Debt Mitigated EM Investor Losses During Dollar Squeeze

Once the rush for dollars eased, sovereign risk premiums over Treasuries started to narrow, sending the gauge of emerging-market dollar bonds up 2.1% this month. In contrast, the euro-denominated index is little changed and the currency is heading for a monthly loss.

Still, it’s far cheaper to borrow in euros than in dollars. The average yield for euro debt is 3.61 percentage points less than that for dollar bonds. That spread was as wide as 4.69 percentage points in late March.

Europe’s ultra-low borrowing costs, benchmarked to the negative deposit rates of the European Central Bank, have acted as a magnet for emerging-market issuers, which increased the currency’s share to about 30% of their overall fund-raising.

While borrowers may balk at the euro’s higher relative costs this month, carry traders are making merry. As many as 16 of the 22 emerging-market currencies tracked by Bloomberg have handed positive returns against the euro, despite interest-rate cuts across the developing world. Russia’s ruble, Indonesia’s rupiah and Colombia’s peso lead the arbitrage, with more than 5% gains each.

The euro slipped 0.7% to 1.0834 dollars on Thursday, while a gauge of the U.S. currency against major peers was on course for a second day of advances.

©2020 Bloomberg L.P.