Basis Swaps: TLTRO ripples; More cable CVA

NZ Kiwi
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The general shape of the EUR/USD curve flattened in ongoing post ECB flow, long cable was active ands JPM takes a rare look at NZD/USD.

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  • TLTRO ripples; More cable CVA

  • JPM: Prospects for foreign borrowing make NZD/USD belly receiving unattractive

  • Flow

  • New issues:

     

    TLTRO ripples; More cable CVA

    The general shape of the EUR/USD curve flattened with 3m/30y curve edging 0.5bps flatter after the first break pushed 0.75bps higher to -54.75bps. This move follows a sharp 9bps rally by the front-end post-ECB on Thursday, which was immediately followed on Friday and yesterday by a slump as month-end saw the front-end offered in a mini-USD grab.   

     

    One long-serving basis swapper said today that the front end of the EUR/USD pushed up because  “the ECB’s adjustments to TLTRO III (see Total Derivatives ) will trigger early repayments and cut down on the surplus EUR liquidity sloshing around the market, which of course pushes the front-end higher.”

     

    And since Wednesday morning, the 3m EUR/USD has pushed up 2bps to -54.75bps (with a big up-and-down move in between), while the 30y has dropped from -17.75bps to -19bps this morning, resulting in a 3m30y flattening of 3.25bps since the ECB announcements last week.

     

    In flow today, the same basis swapper at a (usually) active market participant said that the new issuance market has once again ground to a bit of a halt, subduing activity in a stuttering basis market. “A lot of Europe is on holiday (All Saints Day) and issuance is very limited and vanilla.”

     

    In cable, which has had a dearth of GBP issues and UK issuers in non-GBP currency of late for well-documented reasons, it was similarly quiet. Not for the first time the above trader said that largely invisible “CVA-type flows are still going through the long-end after being very active since the Truss re-pricing, then the Truss unwind (a reference to Liz Truss MP, who was briefly UK PM last month).”

     

    Today saw 30y cable trade a couple of times at -17bps (currently -16.625bps, -0.625bps) “in decent size”, basis swappers said, while there were a few flows in 5y EUR/USD at -32.125bps. CHF/USD traded around -82bps in 5y today but basis swappers said that are no signs that it had traded further along the curve, suggesting yesterday’s CHF 150m 2042 deal from German rail infrastructure company Deutsche Bahn was either pre-swapped back to EUR or is as yet not basis-swapped.

     

    Indeed, strategists at BNPP were unable to detect any basis swap from the issuer when in noted last night that “The CHF (IRS) market was dragged along with the move (in EUR IRS yesterday) but remained broadly better offered, particularly around the 2y tenor where we saw FM accounts receiving. We also saw the 10y tenor heavily offered in the morning off the back of the 20y issuance from Deutsche Bahn, which briefly drove an outperformance versus EUR of about 7bp before payers returned and it came back.”

     

      

    JPM: Prospects for foreign borrowing make NZD/USD belly receiving unattractive

    Strategists at JP Morgan took a look at the far-off land of the NZD-USD cross currency basis swaps market in its latest fixed income weekly strategy note. JPM reflected that last week’s pushback on pricing by the RBNZ was complemented by more conservative commentary from Finance Minister Robertson, who stuck by commitments to maintain low public debt.

     

    JPM said “the coordination of message from monetary and fiscal authorities in the face of another strong inflation print… tilts pressure back toward fiscal policy to drive marginal tightening, and helps the swap curve steepen in relative terms. From a whole-economy perspective, it still seems unlikely that the government, household and banking sectors can all see a sharp contraction in net borrowing over the medium-term, given what this would imply for growth. We therefore still expect a resumption in offshore borrowing to occur over time, and after a sharp (by) drop the NZD XCCY basis curve, we take off receivers in the belly.”

     

    JPM recommends closing “the NZD/USD 1s/5s cross-currency basis flattener - Receive 25K DV01 NZD/USD 5Y cross-currency basis at +16.8bp, pay NZD/USD 1Y cross-currency basis at +0.5bp, a spread of +16.3bp. Closed at +26.1bp, P/L since inception (27th May): -9.8bp.”

     

    Flow:

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

     

    New issues:

    USD new issues:

    • Shengzhou Investment Holdings today priced a $100m, 6%, Nov 2025 bond at par via Bank of China, CICC and Industrial Bank HK.

     

    CHF new issues:

    • Deutsche Bahn yesterday priced a CHF 150m, 2.285% Nov 2042 bond at swaps +25bps via Deutsche Bank.

     

    JPY new issues:

    • Barclays Bank today priced a JPY 2bn, Nov 2027 NC2y, 0.5% bond at par via unnamed lead manager(s) and uridashi agent Aozora.

     

    CNY new issues:

    • Goldman Sachs Financial has priced a CNY 175m, 3.5%, Nov 2027 bond at an undisclosed price via GS.