Dollar Funding Demand Widens Basis Swap Spreads Versus Yen, Euro

The cost to procure dollars surged to levels unseen since 2011 for Japanese borrowers and climbed to a seven-month high for Europeans after the U.K.’s decision to leave the European Union sparked global demand for the greenback.

Cross-currency basis swap spreads showed the cost to borrow dollars in exchange for yen reached 68 basis points on Friday, its highest since November 2011, while the premium against the euro reached 48 basis points, the most since December.

“We need to remain wary of a further increase in dollar funding, a widening of the basis swaps,” said Minori Uchida, the head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. “Rising hedging costs may deter foreign bond investment and help stem the spread from widening, but if it shrinks, investors may resume overseas investment, so pressure remains for the basis swap spread to widen .” 

Global central banks including the Bank of England, the European Central Bank, the BOJ and the Federal Reserve issued statements stressing the availability of liquidity to keep the banking system running. The Fed said it is ”prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets.”

“The basis swaps have widened considerably but pressures remain for a further widening in the gap,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management Co., which managed about $7 billion as of March 2015. 

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