Sept. 18 (Bloomberg) -- Germany and Austria led governments and companies in Europe selling $21.7 billion of bonds in the U.S. currency this week to take advantage of the reduced cost of exchanging the proceeds back into euros.

The sales were the most since February, according to data compiled by Bloomberg, and also allowed nations including Spain and Belgium to attract a wider range of investors at a time when they need money to fund fiscal-stimulus programs amid the deepest recession since the 1930s.

“For Europeans the cost of funds remains advantageous over their home market thanks to the cross-currency basis,” said Noel Williams, a director of dollar syndicate at RBC Capital Markets in London. RBC helped arrange Landwirtschaftliche Rentenbank’s $2.25 billion issue this week, as well as a dollar- denominated bond for Export Development Canada.

The cost of exchanging dollar floating-rate payments into the single European currency as measured by the three-year euro basis swap is 24.3 basis points below the euro interbank offered rate, or Euribor, prices on Bloomberg show. The swap rate traded at about the same level as the benchmark until late 2007, when credit markets began to seize up.

Swap rates are the fixed-interest payments borrowers pay for a floating rate. Governments and companies sometimes prefer to pay floating rates on their debt because their revenue tends to rise or fall as the economy expands or contracts.

Record Sales

European nations sold $10.4 billion of bonds in the U.S. currency this week, the most since Bloomberg began compiling the data in 1999 and beating the previous record of $9.2 billion in January. Sales by the governments, as well as companies including The Hague, Netherlands-based Royal Dutch Shell Plc, added to the $358 billion of issuance in 2009, up 38 percent from last year, Bloomberg data show.

Germany’s $4 billion three-year bond issue on Sept. 14, its first deal in the U.S. currency since 2005, came as the nation plans to sell 346 billion euros ($506 billion) of debt this year, the most ever and almost half of it in bonds.

The sale by Europe’s biggest economy cost the government 25 basis points, or 0.25 percentage point, less than if it had been in euros, said Carl Heinz Daube, head of Germany’s Federal Finance Agency.

The government may issue more dollar bonds “if the arbitrage opportunity is as good as it is today,” Daube said.

Belgian Issue

Belgium’s $1 billion sale of five-year bonds on Sept. 8 also took advantage of the relative cost of raising dollars versus euros, according to Anne LeClercq, head of the treasury and capital markets division of the nation’s debt agency in Brussels. The nation plans to also sell 30.5 billion euros of domestic bonds and 3 billion euros of notes to foreign investors this year.

“The two most important reasons why we were recently able to issue dollar bonds were strong demand from investors” and “a favorable euro basis swap,” LeClercq said in an interview.

The basis swap has climbed from as low as 61.8 basis points less than Euribor in March, as a rally in credit markets drove European bond sales in euros and pounds to a record $1.3 trillion for 2009. The swap rate rose this week as the volume of dollar bond sales surged. It has averaged 21 basis points less than Euribor since credit markets froze two years ago, Bloomberg prices show.

‘Favorable Basis Swap’

“Despite an even more favorable basis swap earlier in the year, credit markets remained difficult, meaning issuers were happy just to get their funding done in the safest way possible,” said Jeroen van den Broek, head of developed markets credit strategy at ING Groep NV in Amsterdam. “The market has now dramatically changed and issuers are looking to achieve gains through issuing in the U.S. currency.”

Rentenbank, Germany’s agricultural development agency, did its three-year bond issue in dollars this week partly because of the relatively low cost of swapping the proceeds of the sale back to euros, according to Karin Gress, a spokeswoman for the lender in Frankfurt.

“The positive basis swap into Euribor means that we have achieved a significant cost saving compared to issuance directly in euros,” Gress said in an e-mailed response to questions. “All cashflows in foreign currency are swapped against cashflows in euros, hence no currency risk is left over.”

Three-month Euribor, the rate banks charge each other for loans, is a record-low 0.76 percent, down from as high as 5.39 percent in October.

Austria, Spain

Austria sold $1.5 billion of three-year bonds. Martha Oberndorfer, managing director of the Austrian Federal Financing Agency, declined to comment on the sale beyond the government’s press release. Spain issued $2.5 billion of three-year bonds Sept. 9.

Shell Plc, through its Shell International Finance BV unit, sold $5 billion of debt in a four-part offering on Sept. 15, according to data compiled by Bloomberg. Stuart Bruseth, a spokesman for the company in London, didn’t respond to phone calls or e-mails seeking comment.

Demand for riskier assets drove the corporate debt yield premium over government benchmarks 0.09 percentage point lower this week to 2.35, the narrowest gap since Feb. 19, 2008, Merrill Lynch & Co.’s U.S. Corporate Master bond index shows.

“On the demand side we have the happy combination of active central banks, an engaged U.S. real-money sector and good retail flows” helping to boost issuance, RBC’s Williams said.

To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

Last Updated: September 18, 2009 11:55 EDT