Eurobonds are not a perfect substitute for dollars, but they may be someone’s only alternative. In some ways, Reflation #3’s weakness can be found originating in this context. The “rising dollar”, or eurodollar squeeze, of 2014-16 was a failure and even run on credit-based dollar funding offshore. If banks won’t deliver dollars, what’s left?

Bonds. There has been an offshore Eurobond market since there have been eurodollars to fund it. These two are not equivalent. Banks in the latter can conjure new “dollars” in the form of any bank liability they may dream up another bank will accept. This flexibility means complexity and in the end fragility.

Eurobonds are savings, a portfolio allocation like stocks. Because it happens among offshore dollar holders doesn’t functionally shift the definitions as it does for eurodollars.

In 2016, in places like Argentina completely shut off from eurodollars the Eurobond market was a lifeline. It doesn’t matter where they get them, they have to have them. The whole world still needs dollars but increasingly there is nowhere to find them (on reasonable terms).

Eurobonds are not eurodollars, as I wrote last October. The Chinese were flirting with this market right at the top of this recent trend. They may have been too late to the party for their own purposes, distracted by the allure of Hong Kong while everyone else was issuing as many Eurobonds as they could.

Bank-derived dollars are almost always the shortest-term, meaning largely overnight, if occasionally termed out a week or maybe a month. There is a huge interest rate differential between obtaining bank-funded eurodollars and longer-term Eurobonds. So while you can get dollars via this workaround, you have to pay up for the privilege.

The Chinese government in issuing its dollar bond in the coming weeks is trying to reduce the cost that Chinese corporates (largely financials) might have to pay if they increasingly go this route. Bond markets, like other markets, work on benchmarks. The cheaper the government can get on its coupons, the cheaper it will be for China’s corporate sector that follows along after it (in theory).