Basis: Issuance takes back seat; Supra 2023 for USD, GBP?

Balancing stones
Basis traders took their lead from issuance today, and had a bit of a breather. Citi says pay JPY/USD, and EU supras may pounce on USD and GBP in '23.

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  • Issuance takes back seat; Balancing flows 

  • BofA: Crowded EUR market may push supras to USD, GBP in 2023

  • New issues


    Issuance takes back seat; Balancing flows

    Basis swappers today said that with new issuance taking a breather as fixed income markets await one last decisive moment of 2022, namely the December meetings of the FOMC, ECB and BOE, basis trading is similarly easing off.


    After some big front-end, month-end wobbles last week, moves in core basis markets are restrained this week. Today has seen 3m EUR/USD unchanged and the curve sliding gently lower down to 30y, which is -0.75bps. And in cable the 3m is +0.375bps and 30y is -0.5bps as it continues its gentle decline from recent high levels achieved in mid-Nov.


    One longstanding swapper said this lunchtime in London that “basis is quiet. There’s not a lot of liquidity right now. I’ll expect a lot more flows before year-end but at the moment we are just seeing balancing trades from corporate customers and funds, and not much of a pattern to the market.”


    The flattening in EUR/USD was likely set yesterday, said sources, via large scale receiving of 20y which saw a suspected end-user swapping fixed EUR to USD and sending 5y10y inverted for the first time in nine months. Since Friday morning the 20y EUR/USD basis has dipped 2.75bps to -26.375bps, including a 1bp move lower today.


    The 5s/10s meanwhile is  currently another 0.25bps flatter after a 1.125bp drop in 10y to -26.875bps today, while the curve from 20y to 50y is a bp more negative at each point.


    Elsewhere, and the front-end of the JPY/USD basis curve is trading close to 6-month high levels, but strategists at Citigroup see paying opportunities there. Citi said in research published over the weekend that, “we enter into a paid position in 1y1y SOFR/TONAR at $30k dv01 at -63bp. The trade carries positively by 5bp over the next six months and we target -48bp with a stop at -73bp. We start the trade small due to the still large macro uncertainties ahead but may look to add if the basis widens.”


    “We like paying the basis here as the continued dovish shift by the Fed should support carry trades. Reduced hawkish risks should bring down realized volatility over time, which will tighten the basis, and the lack of hawkish tail risks reduces the chance of VaR shocks. Next year, we also expect foreign bank funding to shift from FX OIS back to CD/CP as cash holders will look to extend duration beyond short-dated 1m and under maturities. More importantly, we expect reserves will trough in Q1. This should support the basis, especially after the TGA begins to drawdown in April.”


    Risks to the trade, it concluded, “are a more hawkish Fed than near-term forwards project, and any liquidity shocks that would drive stop outs of RV trades.”



    BofA: Crowded EUR market may push supras to USD, GBP in 2023

    Looking at expected bond issuance by EU supras in 2023, strategists at BofA say a crowded EUR new issues market may push more of the AAA-rated European names into USD, and also GBP markets.


    BofA said that “we expect gross issuance in European supranational bonds to increase to €175-195bn in 2023, from around €170bn this year. Net of coupons, redemptions, and ECB purchases, the increase should be more significant, from €90bn to €110-145bn.”


    This, it notes, “is less dramatic than the €210bn increase we project for net European Government Bond issuance, but the two increases compound each other. Heading into 2023, supply concerns may be weighing on the issuers with the least liquid secondary market.”


    Therefore, it said, “unlike the EU and EFSF, the rest of the EU supras that we monitor (EIB, ESM, NIB and COE) have the possibility to issue in currencies other than the EUR. We believe that those could turn more towards USD as demand for USD bonds increases in an environment where the Fed end its tightening cycle, and UST coupon supply drops. GBP issuance could also be attractive in the front-end of the curve, given the richness of short-dated GBP paper.”


    New issues


    USD new issues:

    • Royal Bank of Canada yesterday priced a $1.25bn 3y USD Covered bond. Leads Barclays, Lloyds and RBC (B&D). Aaa/AAA. Mid swaps +85bps.


    EUR new issues:

    • TD Bank is close to pricing a €1.25bn 7y at swaps +110bps. Leads are Barclays, DB, Commerz, ING, SocGen and TD. Books above €2.1bn.


    • Sweden’s Intrum AB (Ba3/BB) is preparing a €300m 5.25y NC2 via Citi, GS (B&D) and SEB. Launch will follow investor meetings that finish tomorrow.


    JPY new issues:

    • BPCE plans a JPY 3y, 5y, 6y NC5 SNP, 8y NC7 SNP, 10y NC9 SNP, 7y, 10y and 10y NC5 Tier 2 sub Samurai. Some tranches may be dropped. Leads are Mizuho, MUMSS (B&D), Natixis, Nomura and SMBC Nikko.