Raw Finance

In 2009, investors bought almost $250 billion of dollar-denominated bonds sold by US and European banks, all with “AAA” guarantees from U.S. and European governments, according to a report by the Financial Times.  Since the global financial industry has recovered from the depths of the credit crisis, governments have been scaling back their efforts to backstop banks, and the banks are now borrowing money without a government stamp of approval.  Thus, as the government-guaranteed bonds sold during the crisis start to mature and get repaid, investors are wondering where to reinvest the cash they receive because there is no longer an equivalent financial instrument. For the rest of 2010, there are $40 billion of such dollar-denominated guaranteed bank deals coming due, according to Dealogic data. The amount of government-guaranteed bank debt rises sharply after that, with over $100 billion due in 2011 and nearly $190 billion in 2012. These figures exclude the bonds denominated in euros and other currencies.

According to the Financial Times, some investors are opting to buy debt with lower ratings and higher yields relative to U.S. Treasury or other government bonds. But due to increasing budget deficits, a long list of federal and municipal governments with “AAA” ratings are lining up for these investment dollars, and many more will be coming in the following months and years.  As interest rates are likely to begin rising later this year, it will be interesting to see where this money goes.

The Financial Times article offers some suggestions: (1) new types of debt with government guarantees, such as a $1.8 billion deal recently sold by the Federal Deposit Insurance Corporation backed by assets such as residential mortgages and construction loans from failed banks the U.S. regulator has taken over; (2) bonds sold by European governments and agencies such as the Nordic Investment Bank or European Investment Bank; and (3) other European credit, such as a recent sale of $2 billion of Bank of England three-year bonds.  Even some riskier credits are finding investors in America: Eurozone governments, such as Italy and Belgium, have launched dollar bonds this year to tap this pool, while Finland, Germany and possibly Greece, in spite of its deficit problems, are lining up similar deals.