Europe Bank Dollar Funding Costs Drop on U.S. Investor Appetite

Money markets signal that European banks have become more attractive to U.S. investors this year, with funds stepping up investment on speculation the chances of a euro-region break up are receding.

The cost for European banks to convert euros into dollars using the three-month cross-currency basis swap was 14 basis points below the euro interbank offered rate as of 4 p.m. in London, according to data compiled by Bloomberg. That’s compared with 27 basis points under Euribor on Dec. 26.

U.S. money-market funds increased their investments in euro-region financial firms by more than 70 percent on a dollar basis since June, Fitch Ratings said in a report on Jan. 28. Banks are less dependent on the European Central Bank for dollars, bidding for the least cash in 16 months at an auction of seven-day loans on Jan. 23.

“Sentiment continues to improve, which makes it cheaper and easier to get dollars on the swap markets,” said Lars Tranberg Rasmussen, a euro-region economist at Danske Bank A/S in Copenhagen.

The cost of the cross-currency basis swap increased from 12 basis points under Euribor yesterday. That was the lowest since May 2011, Bloomberg data show. In January, the cost declined eight basis points, the most since August.

Yankee Bonds

A rise in so-called Yankee bond sales by European banks also showed how U.S. sentiment toward the continent’s lenders is improving. Firms including Rabobank Groep and Intesa Sanpaolo SpA sold $13.2 billion of dollar bonds last month, the most in three months, Bloomberg data show.

U.S. money-market funds’ commitment to European banks rose for five consecutive months before December, when it fell 6 percent, according to Fitch. Allocations to French banks rose that month to 6.5 percent of assets, the highest level since September 2011, Fitch said.

European banks’ “stigma” in the eyes of U.S. money-market funds “has lifted somewhat,” said Chris Clark, a London-based interest-rate strategist at ICAP Plc, the world’s largest interdealer broker. “That’s very evident in the basis swap.”

Before it's here, it's on the Bloomberg Terminal.