Euro-dollar basis swap spreads nearing crisis levels, says Moody’s

Euro-dollar basis swap spreads have widened to levels unseen since the start of the financial crisis, says Moody’s.

One-year spreads climbed above 120 basis points at the height of the crisis in 2008, forcing the market to a halt, and have consistently remained above pre-crisis levels since. 

Recently, basis swap spreads have begun to approach these record-high levels again, passing 100 basis points in the third quarter.

The ratings agency’s report highlights a “sharp inbalance between supply and demand for US dollars” that has resulted from US money-market funds (MMFs) shedding their exposure to Europe amid the sovereign debt crisis.

“Since US MMFs represent an important source of dollar funding to European banks, the closure of this channel has caused a sharp imbalance between supply and demand for US dollars, with the European banks having to pay a significant premium to receive dollars via a swap,” says Moody’s.

Based on these current trends, Moody’s predicts US dollar-denominated issuances to gain further traction and again surpass the euro-denominated equivalents.

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