Basis: Traders monitor front-ends; JPY/USD curve talk

Squeeze 7 Dec 2021
Basis swappers are becalmed by lack of issuance yet poised to act at the first sign of squeeziness. Barclays eyes life insurers and the JPY-USD curve.

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  • Traders monitor front-ends

  • Barclays: Japan life insurers to keep JPY/USD curve concave

  • New issues


    Traders monitor front-ends

    A strongly seasonal tone has engulfed the cross currency swap market approaching the end of a week which saw a couple of issuance sparks (including BMO and Volvo in GBP yesterday), which now seem pretty much extinguished.


    Summing up today’s market, one long-suffering swapper said that “it does now feel really quite like Christmas to be honest. There’s no real market impetus… you could do a clip of stuff if you really wanted to, but the price action says it all. Cable is virtually unchanged, and you’re seeing a few bids below and offers above but nothing happening.”  


    Looking ahead then, there are two main risks to the newfound serenity in basis; central bank decisions next week, and year-end squeeze risk. Considering these factors the above swapper said that “for the Fed (on Wednesday) the market has already priced in 50bps and the Fed has been pretty explicit in signaling that that is what the market will get, so it’s possible there will be little reaction there, so long as Powell makes sure the press conference isn’t too exciting.”


    The Bank of England’s MPC decision on Thursday, he said, carries a bit more volatility risk. “It’s a bit more up in the air,” he said. “There are about 53-54bps priced in today and most strategists predict 50bps, though some are still calling for 75bps.”


    The trader said that “the BOE isn’t as transparent as some central banks so there is some scope for volatility in cable there, particularly in the front-end.”


    And it is the front-end of course that is being eyed so warily by basis swappers as each day towards year-end is ticked off. The dealer said that “at this time of year the front end turn can get very lively but so far it’s been very calm.”


    “I think too many people got active because of issues to do with GSIB and SA-CCR (Basel III counterparty credit rules) at the end of the last quarter… now we’ve got to December and we’ve not seen signs of untypical behaviour by US banks (over- or under-lending en masse). If though the major US banks all came in to borrow cash at the same time then the market would be very quick to panic as it has in the past.”


    But until that happens, the challenge for basis swappers this year is to navigate their way through the three core central bank meetings next week, while keeping a watchful eye on credit issues and the front-end.


    So far today 3m EUR/USD is up by 0.875bps at -32.25bps, close to its recent -31.875bps high following its collapse from -23bps to -70bps at the end of Sep, with minimal changes elsewhere. The same pattern has been seen in cable basis, where 3m is +0.625bps at -16.75bps, which again is about 0.5bps from its post-Sep high. 


    Barclays: Japan life insurers to keep JPY/USD curve concave

    Strategists at Barclays said this week that Japan’s life insurers have faced investment challenges this year that has seen them shift to higher-yielding assets with possible implications for the JPY/USD basis swaps curve.


    Barclays said that “the sharp deterioration in FX-hedged foreign bond yields versus superlong JGBs and the reversal of USD appreciation suggest scope for a further decline in both the FX-hedged and -unhedged foreign bonds of (Japanese) life insurers.”


    It said that “the excess carry on FX-hedged foreign bonds (10y UST-Bund average over 10y JGBs) has deteriorated rapidly with this year’s rate hikes by overseas central banks and USDJPY has reversed its clear uptrend. The foreign bond investment of life insurers, more than that of other investors, tends to be driven by FX-hedged foreign bond yields and exchange rates.”


    So a decline in FX-hedged foreign bond yields has suppressed the foreign bond investment of life insurers. Indeed, said Barclays, “life insurers have indicated a widespread shift from FX-hedged and -unhedged foreign bonds to FX-hedged overseas spread products (eg, credit) and superlong JGBs.”


    It concludes by noting that “their shift to credit products continues to put widening pressure on medium/long-tenor xccy basis with the expansion of samurai bonds and foreign currency financing. Thus, even though the overall USDJPY xccy basis curve is expected to continue its tightening trend, the belly will likely retain its concave shape going forwards.”


    New issues


    USD new issues:

    • Mizuho Markets has priced a $100m, SOFR +50bps May 2023 FRN. Self-led.


    • CBA issued $100m in 5.58%, December 13, 2023 bonds via Barclays.


    • NAB sold via HSBC $100m in 4.76%, December 8, 2025 bonds.


    • Westpac today priced a $100m, Dec 2032, 4.456% bond at par via RBC.


    EUR new issues:

    • Sweden’s Intrum AB (Ba3/BB) yesterday priced a €450m 5.25y NC2 at 10% via Citi, GS (B&D) and SEB.


    • TD Bank on Tuesday priced a €1.25bn 7y at swaps +110bps. Leads are Barclays, DB, Commerz, ING, SocGen and TD. Books above €2.1bn.


    GBP new issues:

    • Bank of Montreal yesterday priced a £1bn, 3y, Covered FRN at SONIA +65bps via Barclays, BMO Capital Markets, Lloyds, NatWest and Santander (B&D).


    • Volvo Treasury yesterday priced a £250m, Jun 2026 4.75% bond at gilts +170bps via HSBC.


    AUD new issues:

    • Tokyo Metropolitan Government today priced AUD 110m of Dec 2027, 3.63% bonds at 99.99 via Daiwa.


    CHF new issues:

    • Kommunalbanken AS yesterday priced a CHF 225m, Dec 2027, `1.275% bond at par via CS.


    JPY new issues:

    • United Utilities Water Finance has priced an JPY 8.5bn, 1.456%, Dec 2037 bond via Barclays.


    • BPCE last night raised JPY70.7bn via a 4-tranche Samurai bond deal consisting of a JPY8.4bn, 2.6% December 15, 2032 with single call at par in December 2027, JPY1.5bn, 1.207%, December 14, 2029,  JPY21.7bn, 1.048%, December 15, 2027 and JPY29.6bn of 0.899%, December 15, 2025. Via MUMMS (B&D), Mizuho, Natixis, Nikko, Nomura and SMBC.


    CNY new issues:

    • Deutsche Bank Frankfurt yesterday priced a CNY 400m, 3.75%, Dec 2025 bond at par via Deutsche.