Latest news with #reverseYankee
Mint
16 hours ago
- Business
- Mint
Shareholders face a big new problem: currency risk
Imagine someone who found secondary-school maths difficult being grilled about logarithms. That is how a lot of equity investors look if you ask them about currency risk. It is not because the question is novel: any client can spot that the share price of an overseas company, or one doing business across borders, ought to depend on foreign-exchange (FX) rates. It is because it is easy to pose, but maddeningly hard to answer. Forecasting earnings is already a pain. It becomes much worse when the task is to make forecasts for each company in a portfolio, before splitting costs and revenues by perhaps a dozen currencies, and then netting it all off against hedging arrangements made years ago by a now-retired treasurer. Unsurprisingly, such analysis is often dumped in the 'too hard" bucket. Time to fish it back out. In recent weeks it has become unusually urgent for investors to work out how unexpected changes in FX rates might affect their portfolios, not least because several such jumps have already taken place. Along with Europe's planned defence spending, the euro has soared against a basket of its peers. The Bank of Japan's newfound hawkishness has made the bull case for the yen more convincing than it has been in years. Jitters over the future of the dollar's global role, meanwhile, have eroded its value—with falls often coming as American share prices have also dropped. This has broken a longstanding hedging relationship for international investors, who used to see the dollar strengthen when trouble was afoot, offsetting losses from stocks. At the same time, the complexity of some popular stocks' FX risk is rising. Big American companies dominate global investors' portfolios—and they are choosing to issue debt denominated in euros rather than dollars. So far this year, according to Bloomberg, a data firm, giants including Alphabet and Pfizer have sold bonds worth €83bn ($94bn) in Europe, a new record. These 'reverse Yankee" deals are priced using the relatively low yields of European government bonds as a baseline, resulting in cheaper debt. They tap a funding source that is less likely to dry up if the newly volatile market for Treasuries convulses again, and therefore seem likely to remain in vogue. For equity investors, though, this offshore borrowing presents a puzzle. Namely, does it raise or lower a stock's currency risk? It certainly means the old hedging relationship between American stocks and FX rates is less likely to make a comeback, since a weaker greenback inflates the dollar value of euro debt, dragging on share prices. If the borrower also has net outgoings in euros, this effect will be even greater. Conversely, if it has net euro revenues, it would previously have been exposed to the risk of a weaker euro, and the new euro debt will offset this exposure. The only way to know for certain is to dig deep into the firm's accounts. Even after doing so, hedging a stock's FX risk can be a nightmare. On the face of it this is surprising, as there is no shortage of derivative contracts (which offer variable payouts contingent on some underlying exchange rate) that might be candidates for doing so. The trouble is that none of them works brilliantly when paired with shares. Forward contracts lock in an exchange rate for a set amount of currency in the future. But since it is uncertain how much a stock will fetch when it is eventually sold, they can be used with much confidence only to hedge the initial cost, not the profit or loss. Options can place an upper limit on losses made from FX movements over a specified time horizon. But their cost balloons as that horizon lengthens, and buying them repeatedly is a sure way to erode returns. Whizzier contracts exist primarily to enrich those who sell them. Of late, the terms of these contracts have worsened, too. The pricing of forwards favours those selling low-yielding currencies in the future, since the trader on the other side can hold a high-yielding one in the meantime and pocket the additional interest. For years, that allowed American and European investors to hedge the yen exposure from Japanese stocks at a better exchange rate than then prevailed. Now Japanese yields have risen sharply, much of the premium has disappeared. Greater volatility across currency markets, meanwhile, has made all hedging contracts more expensive. These days equity investors cannot afford to forgo the grind of working out how much FX risk they are taking. That does not mean there is a lot they can do to mitigate it. Subscribers to The Economist can sign up to our Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence.
Time of India
05-06-2025
- Business
- Time of India
ECB's Lagarde says foreign investors are confident about Europe
European Central Bank President Christine Lagarde said on Thursday that the euro zone appeared to be attracting more foreign investment recently, in a sign that investors are increasingly confident in Europe's economic outlook. "I would say that the economy is responding quite well to our monetary policy , and is delivering on that front," Lagarde told reporters at her regular press conference after the bank's latest rate-setting meeting. "We perceive a serious momentum to improve, to change, to simplify, to streamline, and to encourage and .. welcome capital into Europe. And we are seeing it: The reverse Yankee bonds, significant increase that we have seen in the last few weeks, is a clear indication that there is trust in our system," she said. A reverse Yankee bond is a debt security issued by a U.S. company in a foreign market denominated in another currency, such as the euro. "The capital flow that we are seeing as well - whether it is European investment returning to Europe or a bit of non-European investment coming to Europe - all that is an indication that at least market forces, investors, those who move real money around, actually see value and have confidence in Europe." Live Events
Reuters
05-06-2025
- Business
- Reuters
ECB's Lagarde says foreign investors are confident about Europe
FRANKFURT, June 5 (Reuters) - European Central Bank President Christine Lagarde said on Thursday that the euro zone appeared to be attracting more foreign investment recently, in a sign that investors are increasingly confident in Europe's economic outlook. "I would say that the economy is responding quite well to our monetary policy, and is delivering on that front," Lagarde told reporters at her regular press conference after the bank's latest rate-setting meeting. "We perceive a serious momentum to improve, to change, to simplify, to streamline, and to encourage and .. welcome capital into Europe. And we are seeing it: The reverse Yankee bonds, significant increase that we have seen in the last few weeks, is a clear indication that there is trust in our system," she said. A reverse Yankee bond is a debt security issued by a U.S. company in a foreign market denominated in another currency, such as the euro. "The capital flow that we are seeing as well - whether it is European investment returning to Europe or a bit of non-European investment coming to Europe - all that is an indication that at least market forces, investors, those who move real money around, actually see value and have confidence in Europe."
