Basis: Curve shifts and front end dominate; Turn talk

Swerve curve corner 13 Jun 2022
Sources discuss curve shifts and decent flow in the long-end.

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  • Curve shifts takeover amid lack of primary colour
  • Don’t ignore the ‘turn’ moves in core cross-currency - BNPP
  • New issues


    Curve shifts takeover amid lack of primary colour
    As is only right and proper, cross-currency basis swappers said that a lack of primary market activity is securing an extremely quiet mid-August mini-break for their market ahead of a hoped-for (but not exactly guaranteed) issuance onslaught in the market’s spiritual new year’s day, somewhere in the second week of September.


    Looking at the light smattering of recent basis swappable deals, such as yesterday’s ADB offering in GBP, traders said there were no signs whatsoever of cable flows surrounding its pricing, while Volvo – despite being famously Swedish – is not guaranteed to swap out of EUR when it prices its upcoming €500m 5y bond.


    For once the USD market hasn’t come to the rescue with the odd lumpy-sized USD offering from a European or Asian name, so the situation is, as one seasoned basis swapper put it, that “nothing coming through the primary market is affecting basis at the moment.”


    Instead, he said, this week has been about two things. Firstly, the eternal struggle between inflation fears and recession fears continues its oscillations. “Yesterday’s (below forecast US) CPI number saw a 20 ticks rally in Eurodollar contracts, pricing out the hawkishness that followed strong NFP data last week. The CPI reaction saw EUR/USD and cable basis tighten 1bp in the front end.”


    Today though, he said, “the fixed income market has already reversed its CPI repricing, and we are just starting to see basis follow suit, with offers coming in ion front ends.” The 1y EUR/USD basis, for example, skipped from -33bps to -32bps yesterday, but has dribbled down to -32.5bps today.


    And the other area of activity, which is more of a slower-burning work in progress, can be found in the long end of EUR/USD, where traders said the curve has been in need of maintenance for a while, and is now receiving it.


    “There have been decent moves in the long end of EUR/USD the last two weeks,” said the above basis swapper. “People see the 20y25y area of the curve in positive territory (currently +3bps) and that’s too expensive (by way of comparison the) 25y5y forward is flat to 20y so there could be more flattening there.”


    “And if you look at 15y15y,” he continued, “it’s -21bps while 20y5y is +3bps so there’s still lots of carry there though 20y5y has come down 7.5bps in the last two weeks, but 25y5y at -1bp should also correct for carry reasons – there’s a big gap there between it and 10y5y etc.”


    Beyond these adjustments and some front-end headline trading, basis swappers are busy making the most of a bit of quiet time, while not forgetting to be grateful for small mercies. For example, noted one basis swapper, instead of World War III coming as a result of Nancy Pelosi’s visit to China, the Chinese authorities have just banned the Pelosi family from going on holiday to the Middle Kingdom. Something to be happy about at least.

    BNPP: Don’t ignore the ‘turn’ moves in core cross-currency
    Ongoing regulatory tweaks in global banking, which seem to suggest anxiety about credit risk in the sector as a whole, contributed to sharp moves in year-end turns in core cross-currency basis markets at the end of last month. BNPP strategists have taken a deep look at this, which is summarized here.


    For background, the 6-month JPY/USD cross-currency basis fell from -45bps on June 27th to -71bps on Jun 30, the EUR/USD equivalent fell from -25bps on Jun 28th to -45bps at month-end.


    BNPP said: “We analyse the regulatory aspects that led to the unusually early and sharp widening in the 2022 year-end turn. The relevant regulation largely affects large US banks, as it relates to balance sheets as measured by RWA.”


    In BNPPs view, three elements are important:

    • 1) an increase in the stress capital buffer after the 2022 US bank stress test;
    • 2) an increase in the G-Sib surcharge from 2023; and
    • 3) the implementation of the standardised approach for measuring counterparty credit risk (SA-CCR).


    Looking ahead, BNPP says: “We think FX forwards are likely among the top candidates for reduced exposure under the SA-CCR, and likely led to the wider year-end turn. In addition to regulatory elements, we acknowledge the general increase in volatility which led to lower risk appetite for the year end. However, the over-10% annualised turn could fund the balance sheet cost, under a pro-forma calculation. We hold our 1y1y USDJPY xccy paid position. Entry on 29 July: -80.5bp, Current: -79bp. Target: -69bp. Stop out: -90bp.”


    New issues

    USD new issues

    • Kimco Realty last night priced a $650m, long 10y bond at USTs +190bps via BMO, PNC, UBS and WFS.

    EUR new issues

    • Volvo plans a €500m, 5y bond at around swaps +85bps via Citi. SocGen (B&D) and Mizuho.

    GBP new issues

    • Asian Development Bank yesterday priced a £350m, Dec 2034 bond at gilts +64bps via HSBC, NatWest and TorDom (B&D).

    CHF new issues

    • Commonwealth Bank of Australia has priced a CHF 500m, two-tranche bond split evenly between a 3y at SARON +18 and a 7y at SARON +22bps. Via UBS.