Debt-hungry Americans focking to Europe as interest rate cuts fuel $33bn 'Reverse Yankee'

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A surprise drop in inflation in the Eurozone is helping the continent get a head start on interest rate cuts ahead of its long-dominant U.S. peers. Now businesses in the country are starting to realize they may get a few perks of their own by leaning into this unusual dynamic.

Research from Bank of America shows €30 billion ($32.5 billion) in EU bonds have been issued to U.S. firms so far in 2024. 

This effect, referred to as a “Reverse Yankee,” could be on track by the end of the year to break records for U.S. European credit flows to U.S. companies. 

New interest in European debt has been fuelled by a divergence in monetary policy between the U.S. and Europe, the latter of which has surprised with a rapid slowdown in inflation. 

Consumer price inflation in the Eurozone fell to 2.4% in March, approaching the ECB’s target rate of 2%. 

Meanwhile in the U.S., inflation is proving harder to tame, falling to 3.4% in April. 

Several European banks have moved to cut interest rates ahead of the Fed, breaking a streak of the U.S.’s first-mover status that had stood since the turn of the century. The Eurozone is expected to cut rates in June.

The trend is expected to help Europe’s economy close some of its divergence with the U.S., where consumer spending is expected to take a hit from months of higher borrowing costs.

Investors expect this divergence to accelerate through the rest of the year, with borrowing on the continent expected to become cheaper.

“Creation of euro debt, both organic and synthetic, by US corporates with net investments in the euro area has become more attractive due to the widening US-Euro rate differentials and higher benefits from swapping interest expense to euros,” the authors wrote. 

While the current economic climate is inspiring a swelling of interest in U.S. debt issuance in Europe, the reverse Yankee has been picking up pace for years. 

According to Morningstar, a stronger dollar has increased the attractiveness of buying European firms, which is in part financed in more preferable European bonds.

U.S. vs Euro debt

The U.S., historically not a country that has worried about its debt levels, is facing a reckoning over its Covid-era borrowings. 

Stimulus introduced to ward off the effects of lockdowns was followed by Joe Biden’s mammoth inflation reduction act (IRA), pushing public debt to 121% of GDP.

Now analysts are worried that prolonged levels of high debt may put investors off issuing U.S. bonds. 

Fed chair Jerome Powell said the U.S. needed to have an “adult conversation” about levels of public debt, while JPMorgan CEO Jamie Dimon warned of a “rebellion” among investors who typically issued dollar-denominated debt.

Why this matters

It’s not all rosy on the continent, however. 

European countries, most notably France, are also dealing with elevated debt levels that threaten to hit their credit ratings.

France is dealing with lower levels of economic growth than in the U.S, making it harder for investors to justify confidence in the country’s debt. 

But for now, the increasingly attractive monetary landscape in Europe looks to be assuaging those investors’ fears, setting the continent up for a record year from their friends across the Atlantic.

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