U.S. bond market losing as eurobond market becomes more attractive

By Andrea Heisinger

Omaha, July 30 - The U.S. bond market is being overtaken by the eurobond market, according to a report from the Federal Reserve Bank of New York, although the bank cautions it is too soon to tell if the shift is permanent or temporary.

The U.S. market has lost a large share to the eurobond market, including a noticeable portion of U.S. debt issuers, the report states. This is credited to lower underwriting costs in the euro market, its self-regulated environment and greater variety of financing instruments.

The report also noted the decline in initial public offerings in the United States. In 2000, the U.S. volume of initial public offering issuance exceeded $70 billion while London and Hong Kong saw $20 billion. By 2006 the two foreign markets almost matched the $52 billion issuance volume of the United States, the report said.

It gave as possible reasons for the shift, the costs of implementing U.S. accounting standards, greater legal obstacles and higher equity underwriting fees. In addition, many firms are simply shifting to their home markets as they advance.

In 1995 the volume of corporate issuances in the United States totaled $564 billion - roughly double that of the eurobond market. That disparity has recently vanished and corporate issuance in the eurobond market is now greater than that of the United States.

U.S. firms issuing bonds domestically have dropped from 92% in 1995 to 82% in 2006, according to the report. They credit the shift to the eurobond market's wider range of lenders and debt instruments, and recent reductions in underwriting costs associated with eurobonds.

Underwriting costs for an A-rated conventional 10-year dollar denominated bond in the United States has remained fairly stable since 1996 at about 50 basis points, while an A-rated eurobond of the same maturity has seen a reduction to about 50 bps in 2006 from more than 100 bps.

The report credits the rush by investment-grade firms to issue in the eurobond market to financial globalization trends. If most high-grade companies in the United States issued exclusively in the eurobond market, leaving only lower rated bonds in the domestic market, it could leave the primary debt market vulnerable to macroeconomic fluctuations and systemic risks.

So far the eurobond trend has not affected the credit quality of the U.S. corporate debt market.

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