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Capital Markets

Funding Strategies in Uncharted Territory

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August 10, 2016

By Joseph Neu

Treasurers in The NeuGroup Network spent a lot of time during the first half meeting season discussing funding strategies amid uncertainty in Europe, divergent rate policies and FX market jitters. 

During the course of the H1 meeting cycle, NeuGroup member treasurers discussed funding strategies against a backdrop of uncertainty in Europe; divergent rate policies—waning expectations of a rate rise in the US and negative rates in Europe and Japan; plus currency-market jitters making non-USD funding and related currency swaps a bit of a roller coaster (though still mostly an upside opportunity). Additionally, increasing investment-grade company leverage, which is nearing the March 2002 peak of 2.29x (currently 2.23x) vs. the 1.88x average, is juicing debt-capital market volatility. Meanwhile, issuance remains near record levels set in 2015 of over $1.25T compared to just short of $1.1T in 2014. All the new supply has increased liquidity concerns for some market participants, since banks have reduced the share of their balance sheets allocated to bond trading by 62% from the peak in early 2014. Increasing liquidity concerns are the holdings of investment-grade fixed-income securities, which since 2005 have become increasingly concentrated in insurance companies, mutual funds, and pension funds.

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