As the U.S. dollar surges in value, it’s creating a host of problems for other countries because of the greenback’s outsized role in international finance.
One example: a large majority of long-duration sovereign and corporate debt is denominated in U.S. dollars.
Taiwanese insurers are major investors in U.S. dollar-denominated debt. Citing data from the Taiwanese Insurance Bureau, foreign investments have grown nearly 322% there over the past 10 years, outpacing the 111% growth in the U.S. investment-grade market over the same time period, notes Eric Beinstein, head of U.S. credit strategy at JPMorgan. That translates to some $688 billion, a majority of which JPMorgan believes is invested in long end of U.S. high grade market.
He said Taiwan regulators this week allowed local insurers to reclassify their holdings in a way equivalent to moving to “held to maturity” from “available for sale.” With the average long-end high-grade bond down 33% this year, “this shift should have a material positive impact from an accounting/capital standpoint, much reducing the possibility of a U.K.-like need to sell rapidly.”
Accounting rules are one reason the U.S. is not facing the same trouble as the U.K. Analysts at UBS point out that, in the U.S., pension fund deficits are often amortized over 30 years. In the U.K., they face a much shorter time horizon, often just three years. The U.S. also offers more discount rate smoothing, they added.