DOLLAR FUNDING & US TREASURY FX HEDGING COSTS BEING IMPERILED!

The ongoing blow out in Libor-OIS is having defined and adverse consequences on both dollar funding and hedging costs.

This alone will have a severe impact on foreign banks, because as DB wrote recently,

"the rise in dollar funding costs will damage the profitability of hedged investing and lending by [foreign] financial institutions. Most of the bond investors we have talked with shared a strong interest (and concern) in this topic."

However, the most immediate consequence is that it is now more economical for Japanese investors to buy 30Y JGBs, with their paltry nominal yields, than to purchase FX-hedged 30Y US Treasuries which as of this moment yield less than matched Japanese securities. The same logic can be applied to German Bunds, as the calculus has made it increasingly unattractive for European investors to buy FX_hedged Treasuries.

It's not just rates: the consequences of rising dollar funding costs will eventually impact every aspect of the fixed income market, even if simply taken in isolation due to the ongoing spike in 3M Libor which still is the benchmark reference rate for hundreds of trillions in floating-rate debt!