Basis Swaps: Mystery steepening amid pre-ECB calm; More NOK

Steep 5 Jun 2020
New issuance has thinned out as the ECB takes centre stage. But basis swappers are intrigued by long-end steepening. BNPP eyes JPY/USD tightening.

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  • Mystery steepening amid pre-ECB calm

  • More NOK

  • BNPP: Obstacles to JPY/USD rewidening

  • Flow

  • New issues


    Mystery steepening amid pre-ECB calm

    The cross-currency basis swaps market enjoyed something of a breather this morning ahead of an ECB meeting that few people expected much from, correctly as it turned out.


    As for the building blocks of basis swaps, bond issues, the EUR market has only seen a couple of candidates for cross-currency swapping so far today, from CIBC and from Mexico’s FEMSA.


    Traders didn’t report significant issuance flows in EUR/USD ahead of the ECB announcement, but said that most interest was instead being generated by ultralong moves. The afore-mentioned basis swapper said that “last night we saw a strange steepening in 10s30s EUR/USD, cable and CHF/USD, which might indicate some weakness in USD further out on the curve.”   


    “But… I’m not really sure. Equities have rolled over a little bit in the last couple of days but not enough to really move credit spreads so I don’t think it’s XVA flow even though it looks similar to those trades,” he added. Currently the 30y EUR/USD basis is +1.125bps at -7.75bps while 10y is unchanged at -12bps. In cable 10s30s is 0.75bps steeper after a 0.875bps push higher by 30y.


    In cable, GBP issuance has been ticking over with a £30m tap from BNG and a pending 4-year SONIA-linked offering from Aareal Bank. The deal comes two days after Deutsche Pfandbriefbank priced a £500m at a tight 27bps over 3y SONIA, suggesting the new-look GBP FRN market is funding itself a nice little niche in the world of German mortgage lenders.


    More NOK  

    The wildcard this week has been NOK. As Scandinavia emerges from 6 months of darkness and freezing winter, so too do its bond markets. The EIB popped up with a NOK 1bn tap of its 1.75% Mar 2025 bond while repack SPV SPIRE has priced more deals including a NOK 500m June 2040 offering via Citi, as well as a NOK 982m Dec 2044 through JPM.


    Traders said that with NOK/USD basis swaps hovering near 3-year highs in the 4y sector there are decent funding possibilities for the EIB, while in the ultralong end NOK/USD is at decidedly mid-range levels, but demand from Norwegian pension funds has been prominent of late in purchases of currency-swapped/repackaged issuance in non-NOK currencies and may well be behind the SPIRE deals.


    BNPP: Obstacles to JPY/USD rewidening

    The JPY/USD basis swap mark has enjoyed a fairly wild ride during this new era of corona, with the 10y collapsing 30bps in March 2020 to bottom out at -77bps, then soaring to -30bps in February, dropping back to -45bps last month, and grinding up to -38bps in the five weeks since then.


    These peregrinations find 10y JPY/USD basis close to the eleven-year high of -30bps achieved in February. So, is a re-widening to more negative levels on the cards?


    ‘No’ say strategists at BNPP today. Looking at drivers of this market, BNPP said “Last year, five (Japanese) local authorities issued Yankee bonds in small size for the first time. As they needed more funding for Covid-19, they sought for  any saving on borrowing costs. Issuing domestically. We think such issuance could become a regular occurrence in the near-term.”


    This is despite diminishing returns from the basis swap. “The USD/JPY xccy basis spread is much tighter than a year ago, so the saving for issuing Yankee bonds relative to domestic bonds is smaller, though it is still not at zero. If we assume conservatively that the 10y USD/JPY xccy basis spread is at-35bp, that means local authority issuers who can issue at UST +30bp and JGB +10bp can save 10-20bp,i.e. the saving has fallen significantly.”


    “Although an issuer may end up using a good part of these savings in the bid/offer etc, it may find that general demand for non-yen bonds is higher than for JPY bonds where the absolute yield is limited, especially while the 10y JGB yield is once again depressed to less than 0.1% since April.”


    BNPP highlights two other factors that it says preclude a rewidening in JPY/USD:


    • Japanese banks’ have relied much less on the medium- and long-term xccy basis recently, as they have increased their deposit base in the US, while long-term loans have been weak.


    • We also think Japanese investors receive less at the long-end of fully FX-hedged non-yen bonds, as taking duration risk looks more attractive.


    Thus BNPP recommends paying 10y JPY/USD basis at -37bps, targeting -20bps.



    On the SDR today, EUR/USD flows were reported in:

    • 9m at -10.25bps

    • 1y at -8bps

    • 2y twice at -8.625bps

    • 3y at -8.375 and -8.25bps

    • 4y at -8.25bps

    • 5y at -8.75bps

    • 6y twice at -9.125bps

    • 7y at -10.125bps

    • 8y at -10.75bps twice and -10.75bps twice

    • 12y at -12.875bps

    • 20y at -11.25bps

    • 30y five times in small size around the -7.875bps point


    Also on the SDR today, flows were reported in:

    • 2y cable at -2.75bps

    • 4y cable at +0.625bps

    • 5y cable at +0.875bps

    • 10y at +2bps twice and +1.875bps

    • 20y at -1.015bps

    • 25y at -1.25bps twice

    • 40y cable at +4.25bps


    New issues


    USD new issues:

    • EIB is preparing a $500m tap of its 5y FRN at SOFR +17bps. Lead is BMO.


    • Malaysia’s Petronas plans USD long 10y and 40y bonds in the region of Treasuries +135 and 155bps, respectively. Leads are BofA (B&D), Citi, HSBC, Maybank and MUFG. 


    • Santos is preparing a USD 10y at around Treasuries +250bps. Leads are Citi, MS (B&D) and RBC.  


    • BOC Aviation plans a USD 3y at around Treasuries +165bps. Leads are BNPP, Citi, HSBC (B&D) and JPM.   


    • Korea’s Incheon Airport plans a USD 5y Green bond after meeting investors Apr 22. Leads are BofA, Citi and JPM. 


    • Glencore Funding yesterday priced a $600m 5y, $600m 10y and $500m 30y bonds via JPM, MS, Scotia and SMBC.  Baa1/BBB+. +85bps, +130bps and +160bps. 


    • Coca-Cola European Partners yesterday priced $850m 2y, $650m 3y and $500m 5.75y bonds at Treasuries +40, 50 and 73bps, respectively. Leads are Citi, CS, DB (B&D), GS and HSBC.   


    • Malaysia yesterday priced $800m 10y and $500m 30y Sustainability Sukuks. Leads are CIMB, HSBC (B&D) and JPM. Treasuries +50 and 80bps, respectively. 


    • Bank of China Singapore yesterday priced a $500m 3y Green Reg S at Treasuries +53bps. Leads are BoC, CA, Citi, CCB, DBS, Mizuho, OCBC and UOB. 


    • Bank of China Luxembourg yesterday priced a $500m 5y Green Reg S at Treasuries +66bps. Leads are ABC, BoC, Bank of Comms, BNPP, BofA, Commerzbank, CA, Citi, DBS and SEB. 


    • Kommuninvest yesterday priced a $1bn 3.5y Reg S at swaps flat. Leads are Citi, GS, Nordea and TorDom. 


    • Kommunalbanken yesterday priced a $500m FRN maturing October 2023. Leads are Citi, HSBC (B&D) and RBC. SOFR + 16bps.


    EUR new issues:

    • CIBC is close to pricing a €1bn 8y covered bond at swaps +5bps via BNPP, CIBC, DZ Bank, HSBC and UBS.


    • Mexico’s FEMSA is close to pricing a €700m 7y Sustainability bond at swaps +70bps and a €500m 12y at swaps +105bps. Via BofA, HSBC and JPM (B&D).


    GBP new issues:

    • Aareal Bank AG is close to pricing a £500m 4y covered Bond at SONIA +31bps via Deutsche, HSBC, NatWest and Nomura.


    • BG Bank NV has priced a £30m tap of its 0.5% Dec 2026 bond via BofA and RBC at gilts +27bps.