Basis: Front-end reclines in dead market; Barclays eyes 2023 in EUR/USD

Deflated balloons field 21 Jun 2021
With long-ends resting for Thanksgiving, the very front ends of core basis markets fell-back after a USD-driven surge. Barclays eyes 2023 for EUR-USD.

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  • Front-end reclines in dead market

  • Barclays: Short-term volatility versus long-term trough in EUR/USD

  • Flow

  • New issues


    Front-end reclines in dead market

    A persistent move higher by the front ends of the major cross-currency basis curves today reversed as the 3m EUR/USD point sagged 3.125bps to -40.625bps, while the cable first break dipped 1.375bps to -17.25bps. But respectively they are still up by 11bps and 10bps respectively from where they started this week, while JPY/USD is up 16bps.


    Explaining the surge higher one long-suffering swapper said this lunchtime in London that it just reflects “less dollar premium on the term line… now USD is trading about 10.7% for the year end turn versus 12.5% a few days ago,” a move that has fed into the uneven, but ongoing, recovery from the end-Sep quarterly collapse in first breaks that saw 3m EUR/USD touch -70bps, and 3m cable drop to -37bps on Oct 4.


    Yesterday, beyond the very front end, the 3-4y area of EUR/USD was also bid but that has faded away today, according to traders.


    And with the Thanksgiving holiday sucking the juice out of the market, even the drive higher in first breaks has temporarily (at least) evaporated, as has activity in much of the rest of the market. “It’s dead,” said the swapper of activity further along the major basis curves, something that might not be too dismaying for traders after choppy recent times and with a lot of World Cup football around to fill in the empty hours.


    Cross-market USD new issuance has been pretty much on hold since Tuesday, while in EUR there is similarly little going on in this department since a brace of deals (Liberty Mutual in 8y and GSK in 5y and 10y) yesterday. Nordea Mortgage Bank today issued a €1bn 3y bond but as a Finnish covered bond, albeit with pan-Nordic operations, it is not clear if this is an obvious cross-currency candidate.


    Beyond the front-ends today, both EUR/USD and cable were unchanged at key curve points from 5y onwards, suggesting that the remainder of this week is to a great extent ringfenced off for some much needed R&R.  


    Barclays: Short-term volatility versus long-term trough in EUR/USD

    Strategists at Barclays this week took a look at the prospects for the EUR/USD basis market in the medium term, seeing a clear divide between drivers and possibly direction in the short and long ends of the curve.


    In the front-end, Barclays said that the “confluent effect of the Fed’s policy normalization on USD liquidity and investment flows will likely bring greater two-way volatility in short-tenor xccy basis in 2023. Other potential drivers of xccy basis include global recession, other central bank policy, and regulatory pressures.”


    Expanding on this, it added that, “Short-tenor xccy basis has traded mostly rangebound in 2022 except when greater-than-usual year-end turn exacerbated the seasonal widening (at the end of Sep). In in 2023, we expect the Fed normalization path (both in terms of rates and QT) to drive two-way volatility in short-tenor xccy basis via dual channels of investment flows (demand) and USD liquidity (supply). We believe that the relative stability of short-tenor xccy basis in 2022 (outside year-end turn) is no longer promised.”


    But while the front-end may be more volatile next year, Barclays concludes that “Xccy basis has tightened more recently with broad USD-payer trades being kicked in as the Fed pivot got increasingly priced and relative ASW moves reversed somewhat. Looking into 2023, our forecast assumes broadly sideways swap spreads in both USD and EUR, suggesting limited directional impacts on xccy basis as well.”


    And in the long-end, Barclays says “we expect higher USD issuance (in 2023) than EUR issuance by SSAs while corporate cross-border activity could remain broadly unchanged, suggesting that issuance-related flows will exert tightening pressures on long-tenor EUR xccy basis. The USD supply is also improving with imminent signs of Fed pivot, indicating that any significant widening in EUR xccy basis could be contained.”



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


    New issues


    USD new issues:

    • Swedish Export Credit on Tuesday priced a $1.75bn 3y Global at swaps +51bps. Leads are BofA, BMO, Scotia, MS. Aa1/AA+.


    • NIB on Tuesday priced a $350m tap of its May 2026 FRN at SOFR +41bps. Leads are HSBC and JPM.


    EUR new issues:

    • Nordea Mortgage Bank is close to pricing a €1bn, 3-year Green Finnish Covered Bond at swaps +2bps via BNPP, Deutsche, HSBC, Nordea and UBS.


    • Liberty Mutual Group Inc, a US insurer, yesterday priced a €500m 8y at swaps +200bps through BofA (B&D) and DB.

    • GSK Capital, a UK pharma, yesterday priced €500m 5y at swaps +35bps and €700m 10y at swaps +55bps. Led by BNPP (B&D), DB, JPM and Standard Chartered.


    JPY new issues:  

    • Berkshire Hathaway Inc plans a JPY multi-tranche Samurai via BofA and Mizuho.


    CNY new issues:

    • The IBRD yesterday priced a CNY 300m, Dec 2025, 2.42% at par via Banco Santander China.