In the hunt for yield, some years ago European investors started to allocate part of their credit exposure to dollar assets. However, many then put a stop to this diversification due to high hedging costs. In the context of the Covid-19 outbreak, the Fed cut rates to post-Lehman lows. Consequently, euro and dollar interest rates converged significantly, reducing hedging costs and making a case for broadening the investment universe from a European to a global base more attractive.
This approach is reinforced by the fact that – in a ‘lower-for-longer’ interest-rate scenario – European investors have been increasing the euro credit share of their investments, in some cases leading to credit-risk limit saturations on major European issuers. Against this backdrop, the dollar corporate market offers European investors attractive diversification opportunities in terms of issuers, since 80% of US domestic issuers have never issued in euros, as well as across sectors and maturities.
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