Basis: Year-end turn fear not turning up?

Year-end turn move not turning up?

Freed from the distractions of cross-market bond issuance and with no clear signs of market panics – despite the odd wobble – evident so far this month, basis swappers this afternoon felt sufficiently emboldened to cautiously predict a quiet end to a noisy 2022.

Summing up the year from a cross-market perspective, one basis swapper in London today said that “we may see some late issues tomorrow, but for both investors and issuers this year is basically over.”

In the wake of the as-expected 50bps BOE hike cable has merely held onto the bounce that started late yesterday from its low of -24.5bps, and is back to around -16bps. And in EUR/USD, after a similarly widely predicted 50bps ECB hike, the 3m EUR/USD was for a while after the news just 0.5bps higher than before, at -33.75bps, but has since popped up to -31bps following subsequent hawkish Lagarde comments.

Reflecting on 2022, the swapper said that “it’s been a super-interesting year but exhausting, because of rate moves, changes in the plumbing (QT, TLTRO etc) and even yesterday there was a big flow going through in the front-end of EUR/USD which seemed to catch people out ahead of the Fed (and its hawkish 50bps hike).”

Yesterday saw 3m EUR/USD trade down from -33.75bps to -40bps before reversing the journey in the afternoon. The above swapper said that the move reflected “flow going through, bidding USD ahead of the Fed risk event, and with not many people wanting to take that risk on at this late stage of proceedings, the moves were pretty lively.” And the on-target nature of the hike itself helped the recovery, he added.

Looking to the notorious year-end period that has seen much bigger drives in front-end basis than were seen yesterday, typically as a result of risk-off USD land grabs, the swapper was uncertain how this year will pan out.

“Based on some of the recent year-ends you just never know, but the 3m LIBOR-SOFR spread is a good indicator and it’s gone from 100bps a little while ago down to 23bps yesterday. It is shifting lower in line with Fed hike expectations, a while ago people talked about a 7-8% peak in Fed funds, but now we seem to be in a situation where supply chains are improving and while inflation’s high, it might not be going any higher (which is a calming factor for 3m EUR/USD basis).”

Looking at the short-term prospects for the market, concluded the trader, “tomorrow should realistically mark the end of the year in practical terms. Bid/offer spreads should go wider and barring a front-end squeeze, that should dry up any lingering flow.”  

JPY new issues:

• Societe Generale has priced JPY 1.6bn of 5-year, 0.67% Uridashi bonds at par via unnamed lead managers.