The U.S. economy is roaring ahead of its peers, with growth estimates still being upgraded by the International Monetary Fund. But a more rapid U.S. expansion will have inevitable knock-on effects for the burgeoning pile of U.S. dollar-denominated debt issued by foreign governments and companies in the last decade, even if that takes time to feed through.
Since the global financial crisis, overseas bond issuance is a story of two currency blocs—the dollar and everything else. International bond-market borrowing in all currencies except the dollar is basically flat compared with mid-2008 levels.
In contrast, dollar bonds have become more popular: the outstanding amount issued by borrowers outside the U.S. runs to more than $10 trillion, more than twice the level from before the collapse of Lehman Brothers.
When discussing the impact of a resurgent U.S. economy on emerging markets, analysts and investors often think about the classic risk of a sudden stop—capital inflows reverse, the local currency depreciates rapidly and borrowers suddenly struggle to refinance their obligations.
There are good reasons to think that won’t happen this time around. The Federal Reserve has repeatedly committed itself to a lower-for-longer interest rate strategy, which would allow inflation to run above target for a period. Foreign borrowers have borrowed at longer and longer maturities, protecting themselves from short-term surges in interest rates.
