Basis: Divergence reversed after gilt flight; Gamma bids

Gammon vol


  • Divergence reversed after gilt flight; Gamma bids

  • JPM: Front-end widening has further to go

  • Flow

  • New issues


    Divergence reversed after gilt flight; Gamma bids

    The biggest move of the last few days in cross-currency bases has been in front-ends, where first breaks plunged, and have so far failed to bounce, as the end of September ushered in the now traditional (in times of market unrest) USD squeeze with an eye on year-end holiday funding in an uncertain world.


    In EUR/USD the 3m part of the curve collapsed from -23bps to -70bps on Weds and Thurs, and is now languishing at -68.5bps, with history suggesting that it may yet drift lower before beginning to rise possibly sometime in November. A similar phenomena was seen in cable where 3m SONIA/SOFR went from a short-lived all-time high of +1bps to -33bps over the same short period, and is now marooned at -37.375bps.  


    Basis swappers today insisted that despite the depth of the falls there was nothing very surprising to them about these moves. More interesting, they said, during a tumultuous week across fixed income markets last week, was the divergence between EUR/USD and cable further along the curve.


    One such trader said the uncertainty and alarm created by the UK’s mini-budget of Sep 23 created massive moves in 10y and 20y cable and EUR/USD and, perhaps more notionally, in GBP/EUR.


    “There was massive divergence last week with people escaping gilts and gilt ASW positions, sending the long-end massively lower in cable, while cross-gamma flows in EUR/USD sent the 10y and 20y points of the curve much higher. That stopped with the BOE intervention on Wednesday.”


    XVA desks were kept busy by unprecedented volatility at the long end of the sterling curve combined with surging CDS spreads for UK IG credits with swapped bond issues. Meanwhile the UK funds' appetite for hedged EUR and USD credit added another layer of margin calls and complexity (see here).


    During that early stage of last week 20y cable (for example) fell from -25bps to -47bps and is now at -28.875bps. The 20y EUR/USD basis jumped from -28bps to -21.5bps (now -23.25bps), while GBP/EUR fell from +2.375bps Monday to -25bps, but is now up at -5bps.


    The story since the BOE intervention, said the long-suffering basis swapper, has been one of attempted price normalisation and market wariness. Especially in cable.


    He said 10y gilts are, “Currently 15bps lower, so cable is still trying to manage these huge gilt moves and is pretty much waiting for them to calm down.” Given that normal gilt movers are very rarely mentioned in communications with basis swappers this is another small reminder, if needed, that the wild volatility in a dysfunction in gilt market is causing ripples in areas usually way beyond its influence.


    Today, despite a slight uptick in new issuance, new issue flows are barely registering on basis swappers’ radars. Instead, said the above swapper, “We are seeing long-end cable very well bid,” in what he said were more gamma hedging flows related to that gilt market volatility.


    In particular there has been a peppering of flows in 12y and 15y cable at -27.25 and -27.75bps respectively, while the 12y is +0.5bps on the day so far at -26.5bps, 15y is +0.875bps so far at -27bps, while 30y and 50y cable are both +1.25bps at -27.25bps and -21.75bps respectively.


    Front-end cable is a little better offered for choice, while in EUR/USD the pattern is the same, with the front-end a little lower, and the long-end better bid, but with smaller moves than in cable (for example 30y EUR/USD is +0.125bps at the time of writing).  


    JPM: Front-end widening has further to go

    In a brief glance at cross-currency basis in its latest global fixed income strategy note, strategists at JP Morgan warned that the southerly move in the front-ends of EUR/USD basis swaps may yet have further to go.


    It said that "year-end pressures, which have started to widen significantly recently and any tiering of reserve remuneration could pressure spreads wider over the coming weeks. For instance, on year-end EUR/USD cross currency turn, current levels are already significantly wider versus the lows seen over the past few years and seasonality suggests that these pressures tend to peak around end-November/early December." 



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



    New issues


    USD new issues:

    • DNB Bank plans a two-tranche USD benchmark consisting of a 4yNC3 fixed-to-floating bond at around USTs +195bps and a 4yNC3 FRN at the SOFR equivalent. Via BofA, Citi, JPM, MS and TorDom.


    • EDP Finance BV has priced a $500m, Oct 2027 Green private placement at USTs +245bps via Banco Santander, BBVA, BofA, Credit Agricole, Deutsche, Goldman, Mediobanca, MS, SMBC, Santander and SocGen.


    EUR new issues:

    • Smith and Nephew plc, a UK medical device company, is pricing €500m (max) 7y at swaps +185bps through BofA, Mizuho, SMBC Nikko (B&D) and SocGen.

    • UniCredit Bank Czech/Slovakia has priced a €500m Covered at swaps +55bps through UniCredit (B&D), DZ, Erste, LBBW and RBI.

    • Bank of Montreal is pricing EUR 4y Covered around swaps +17bps through BMO, Commerzbank (B&D), HSBC, Natixis and Rabobank.

    • Jyske Bank is pricing EUR 3.5y NC2.5 SNP around swaps +220bps through BNPP, Deka, JPM, Jyske and Swedbank.

    • DBS Bank is pricing EUR 3y Covered around swaps +19bps through DBS, Helaba, ING (B&D), Natixis, NordLB and SocGen.


    CHF new issues:

    • Auckland Council has priced a CHF 100m, 5y 1.66% bond at flat to SARON, as well as a CHF 100m, Oct 32, 2.005% bond, also flat to SARON. Via BNPP and UBS.  


    • SocGen has priced a CHF 100m, 2.625%, Oct 2026 bond at par to yield swaps +105bps via CS.


    JPY new issues:

    • RBC London today priced a JPY 500m, 0.9%, Oct 2029 bond at par via RBC.