Basis: Oh Canada! Oh Quebec! And BOJ YCC flows?

Herding wildebeest 10 Jun 2020
As new issuance revives again, the Canadians are clustering. And can the market expect hedged bond unwinds after the BOJ?

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  • Oh Canada! Oh Quebec! LDI or gamma in long-end?

  • Citi: Japan flow, hedged bond holdings and BOJ YCC

  • Flow

  • New issues


    Oh Canada! Oh Quebec! LDI or gamma in long-end?

    As new issuance starts to revive once more from its mid-January indigestion/MLK Day mini-break, the Canadians are starting to cluster – as is their wont --  with the EUR market emerging as their clusterpoint of choice.


    Just yesterday it was all sterling, sterling, sterling from the Canadians as EDC and RBC whipped up £1.25bn of sales between them, while TorDom took a solo trip to CHF. Today EUR has caught the eyes of the Canadians, with National Bank of Canada planning to swoop like a loon into the 5y sector, following a 10y from Quebec.


    And it is the Quebec offering that has got the market moving and tongues wagging. Its €2.25bn behemoth was announced yesterday and came today at swaps +41bps. One basis swapper in London said today that “It’s all moving on Quebec (which) has driven very, very heavy flow, which has sent 10y lower, starting yesterday (since when the 10y EUR/USD has dipped from -24bps yesterday, to -27.75bps this lunchtime, and is now in the ascendence at -26.125bps). I still think the 10y has a little further to go.”


    The basis swapper said that heavy EUR issuance has weighed on EUR/USD basis all of this last week, with the 10y at -22bps seven days ago.”


    “It should bounce soon,” reckoned the trader, “but I think the belly of the curve still has a couple more bps to go before it starts to turn around.”


    With USD supply remaining the champion of 2y to 5y supply, and EUR dominant in 5y to 10y, the trader said that 5s10s has flattened significantly with the 5y having dropped just 3bps to -25.25bps over the last week, resulting in a near 5bps flattening at the low in 10-years earlier today.


    And, added the basis swapper, “supply in EUR is being taken down so well that the flattening could persist for a little while yet.” The books for Quebec alone were above €3.1bn, so there is demand there to be mopped up yet. Maybe by another Canadian? 


    Elsewhere, the GBP issuance train, said the trader, “is going well, but that’s not really being reflected in basis where the belly isn’t moving much. In the back end there is a noticeable bid, which looks like cross-gamma but given that gilts are pretty much in the middle of their recent range having done a bit of a round trip over the last couple of months, I’d say that it’s less likely to be cross-gamma than UK LDI account hedging, but we are not privy to that here.”


    In terms of flow today, standout areas have been EUR/USD, where the 10y of course shone, trading a lot between 25.875bps and 27.75bps. In JPY/USD there was a lot of 5y flow at -66.125bps, and a lot of 3y flow at -57.25bps and -57bps, which would fit with today’s news of a 3y USD JBIC offering at around SOFR +65bps. In cable, there was 10y flow at -18 and -18.25bps. 


    In the background, more US banks have left blackout today, but the issuance announced so far - from BofA and Morgan Stanley - has all been in USD.


    Citi: Japan flow, hedged bond holdings and BOJ YCC

    Citigroup holds what it calls a "non-consensus2 view that the BoJ will abolish its YCC policy this week, and it explains what this could mean for cross-border flows out of hedged and unhedged foreign bond holdings, back to higher yielding JGBs.


    "We see the risk of around ¥20trn of repatriation by life insurers and investment funds. However, we believe that this risk is the largest for USD-denominated credit products, with OAT demand having already decoupled from its past relationship to OAT spreads."


    "Headwinds for Japanese portfolios from rising non-JGB yields — Overseas holdings of Japanese portfolios have suffered from rising non-yen yields, alongside an increase in hedging costs due to the rise in foreign central bank policy rates. This has driven outflows from Japanese portfolios, particularly of assets with a negative carry.


    "Japanese banks have already repatriated most of what they needed, and pension funds are unlikely to repatriate regardless of FX-hedged yield differential. However, there might still be around ¥20trn of repatriation left from life insurers and investment trusts, largely from USD-denominated credit paper, in our view."


    "Japanese demand for European assets has already decoupled from OAT yields...This follows a period of net selling of OATs by Japanese accounts since the beginning of 2020. Net, whilst European assets might respond with a knee-jerk sell-off on any abolition of YCC by the BoJ, the impact might be limited by yield-sensitive holders having already trimmed their EGB holdings."



    Basis trades on the SDR can be seen here: Total Derivatives SDR. Note that the Total Derivatives SDR now shows broker/trading platform for each trade, where reported. 



    New issues


    USD new issues:

    • CADES is preparing a USD 3y Social bond at around swaps +42bps. Leads are Barclays, GS, HSBC and SocGen. Expected to price Jan 18.


    • JBIC (A1/A+) plans a USD 3y Global at around swaps +65bps. Leads are Daiwa, Citi (B&D), GS and JPM. 


    • Asahi Mutual Life has priced a $375m perp NC5 (BBB) at 6.9%. Leads are Citi, Mizuho and MS.


    EUR new issues:

    • Quebec is pricing €2.25bn 10y at swaps +41bps through CA, DB, HSBC, JPM and RBC (B&D). Order book size reported to be above €3.1bn.


    • National Bank of Canada plans a EUR 5y senior Bail-In bond through BNPP, Commerzbank, NBC, Natixis and NatWest after meeting investors Jan 17.


    GBP new issues:

    • DBJ has priced a 4.5% Jun 2025 bond at gilts +115bps via Barclays, HSBC and Nomura (B&D).


    • Caixa Bank is on the cusp of pricing a £500m, 10.75y Tier 2 sub at gilts +370bps via Barclays (B&D), CS, Caixa and NatWest.


    • Credit Agricole Monday priced an £850m, 4.875%, 6.75y bond at gilts +160bps via Barclays, CA, Lloyds (B&D) and Nomura.


    • RBC yesterday priced a £650m, 5-year, 5% bond at +165bps via NatWest, RBC (B&D) and Santander.