Basis: Central banks take centre stage

Bank of england 18 Oct 2021
The 50bps rate hike by the BOE’s MPC today may have been marginally smaller than expected but did have a strong flattening impact on cable basis.

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  • Central banks take centre stage

  • Banks sources of dollar funding slowly shifting - BIS

  • Barclays: Further JPY-USD basis widening still a risk

  • Flow

  • New issues


    Central banks take centre stage

    The 50bps rate hike by the BOE’s MPC today may have been marginally smaller than the GBP fixed income market was pricing in, but at 50bps was both large enough to be significant, while being small enough to raise expectations for future hikes.


    One basis swapper said that the process of digesting this week’s hawkish Fed hike and outlook, combined with the BOE’s announcement today, had becalmed cross-border bond issuance. A slight exception was the Japanese borrowers, namely JBIC and Japan Tobacco, who again stood out in USD as they made plans to extend their lively post-Summer spell (see Barclays below).


    In cable, one long-standing basis swapper said that “(GBP) issuance hasn’t been that prominent ahead of the BOE…. The MetLife deal (£200m 1y yesterday) disappeared without making an impression and today’s flattening was a mechanical reaction to the hike.”


    Flows across the core basis markets, he added “were more little trades, to do with position-managing rather than new issuance,” although he noted “quite heavy flow in 5y cable at or around -27bps,” which “Might be to do with the underlying moves there (which were large).”


    Meanwhile, in EUR/USD, the same swapper said he thought that issuance was taking a breather to avoid turbulence elsewhere and after “an OK September so far.” He noted some ultralong (25y flows) related to XVA hedging around the -25bps level and at around -20bps in 30y, but said that flows even there were quite light.


    At the end of the session, with front end cable skipping higher on the MPC, 3m/10y cable flattened about 4bps with 3m the big mover, +2.375bps at -6.875bps with 10y at down a bp at -24bps. The EUR/USD curve was little-changed.



    Banks sources of dollar funding slowly shifting - BIS

    The latest BIS Quarterly Review from the gnomes of Basel has a chapter on the shifting sources of banks' funding (see here and here). 


    They conclude that "Bank funding sources have been shifting: from cross-border to local funding, which enhances stability, and, within cross-border funding, from inter-office to unrelated sources, increasing volatility. Shifts in the funding mix of local banking systems stem from the declining share of foreign banking offices, which rely more heavily than domestic offices on cross-border and inter-office funding. The retreat of foreign banking offices has increased the concentration of nationalities in local banking systems, which is associated with heightened funding volatility."


    Barclays: Further JPY-USD basis widening still a risk

    Looking at recent decent moves in JPY-USD basis, Barclays strategists said this weekthat “medium/long-tenor USDJPY xccy basis has seen its earlier rapid widening take a breather, but remains at wide levels. 5y basis averaged around -50bp in H2 21, but reached -99bp at end-June, leading the overall widening trend in the medium/long-term sector from the start of the year. After subsequently tightening at one point to around -80bp in mid-August as recession concerns cooled Fed rate hike expectations and led to some recovery in risk assets, they widened again to around -90bp as inflation concerns reignited those expectations for Fed rate hikes.”


    It said that the widening “likely reflects both an increase in the USD funding demand from Japan and a pullback in USDJPY basis payer interest from overseas accounts.”


    It said the former reflects “an increase in samurai bond issuance to take advantage of Japan’s low interest rates against a backdrop of domestic-overseas monetary policy divergence, (and) an increase in non-sovereign bond investment (eg, credit investment) with the deterioration of FX-hedged sovereign bond yields (although flows have recently turned sluggish), and… a recovery in overseas bank lending driven by the resumption of M&A finance and loan demand due to normalizing business activity.”


    Meanwhile, “the basis payer appetite of overseas accounts (eg, hedge funds, foreign bank treasury desks) still appears restrained and a lack of payer interest likely exacerbated the widening pressures from increased funding demand, as noted above.”


    That lack of payer flow has seen JPY-USD basis volumes drop this year, said Barclays, noting though that “USDJPY xccy basis tightening pressure could strengthen with a recovery in payer demand linked to carry trades. That said, given the mounting volatility in short-tenor xccy basis toward year-end and the Fed’s data-dependently hawkish stance, the risk of widening warrants continued attention for the remainder of the year. We recommend a stance of range-trading and building payers near the lower bound of the range (around -100bp in the 5y).”



    Basis trades on the SDR can be seen here: Total Derivatives SDR.


    New issues


    USD new issues:

    • Japan Tobacco plans investor calls ahead of a 10y or 30y bond issue via BofA and JPM.


    • JBIC plans a USD 5y benchmark Green bond after meeting investors from Sep 26. Leads are Barclays, CA, Daiwa and MS.


    EUR new issues:

    • Smith & Nephew PLC has mandated BofA Securities, Mizuho, SMBC Nikko and Société Générale to lead a 7y €500m, fixed rate bond issue following investor calls this coming Friday and Monday.


    GBP new issues:

    • Met Life Global Funding yesterday priced a £200m, SONIA +45bps, Sep 2023 FRN via CS.   


    • BPCE on Tuesday priced a £250m, Sep 2028, 6% bond at gilts +265bps via Barclays, HSBC, Natixis and Nomura.


    JPY new issues:

    • BNP Paribas yesterday priced a JPY 832m, Sep 2025, 4.11% Uridashi bond issue at par via Chugin.