Basis: New Year imposes break; ASWs and USD SSA supply

New Year imposes unwanted break

While the situation in Ukraine becomes more serious and for the Ukranians more awful on a daily basis, and UK politics continues to reek of drift and murk, the reality is that markets have been much calmer and more functional than was the case in H2 2022.

For cross-currency basis swappers that has meant a market packed with new issuance and lots of basis flow. Until now. One slightly frustrated trader told Total Derivatives today that “there really is nothing to tell you so far this week.”

The seasoned swapper said that “It’s Chinese New Year this week so when you take out Chinese and Taiwanese investors that’s a lot of the market just gone. It’s especially true of the USD market where about half of the new issuance ends up there.”

With core government bond markets also much less volatile that was the case at times last year, ultralong hedging by XVA types is also much less visible than it has been, leaving basis swappers little material to work with.

Summing up price action across both cable and EUR/USD the above trader said that “yesterday they went a little lower, today they’re both a little higher, there’s no real pattern because there’s just not much flow to move anything.” Today both EUR/USD moved in a tight range of unchanged to +0.25bps across their 3m to 30y curves.

If these conditions might seem primed to allow one of the smaller currency markets to seize the limelight by trying to scoop up what demand there is outside of China and its diaspora, it hasn’t really happened. Only Scandi is showing much interest in stepping up via a possible DKK, NOK and/or SEK deal from Jyske Bank following a mandate announcement today, plus a NOK issuance yesterday from the IBRD.

Tighter EUR ASWs support 3-5y SSA issuance in USD: Citi

Better relative levels due to tighter EUR swap spreads may encourage greater USD issuance by Eurozone SSAs in the 3y to 5y area of the curve, suggest analysts at Citigroup this week, especially for French and German agencies benchmarked to government bonds. They explain:

“USD funding levels improved relative to EUR for several European SSAs, mainly a result of tighter EUR swap spreads. This could lead to increasing USD issuance from European issuers this year.”

 

“Historically, a wider hedging basis was likely a direct result of wider XCCY basis, as the swap spreads in USD and EUR largely moved in a similar direction. However, in 2022, EUR swap spreads widened sharply from their historical average levels, becoming the dominant factor driving the change in the hedging basis. This widening broke the long-term relationship between the XCCY basis and the hedging basis.”

 

“In 2023 YTD, the XCCY basis has only changed marginally. The recent widening in hedging basis was still driven by the tightening in EUR swap spreads.”

 

“Spreads between dollar-swapped EUR SSAs and USD SSAs are likely to widen as the hedging basis goes up, thus USD funding becomes more attractive relative to EUR. We observe this improvement for issuers like KFW and CADES, whose EUR bonds are trading to sovereign benchmarks in the € market.

 

“(However) the widening in the hedging basis showed little impact in improving USD funding levels for some European SSAs like EIB this time. For these issuers, their bonds are mostly benchmarked to swaps in the EUR market, therefore, the dramatic change in EUR swap spreads was removed.”

Flow

Basis trades on the SDR can be seen here, now with name of broker/platform attached: Total Derivatives SDR.

New issues

 USD new issues:

• Turk Eximbank plans a 3-year, USD-denominated 144A bond issue at around 10% via Citi, (B&D) ING and Standard Chartered.

EUR new issues:

• TDC NET, a Danish telecoms group, plans to sell EUR 7y SLB later this week through Barclays and BNPP.

   

• Swedish burglar alarm company Verisure yesterday priced a €450m, 7.125% 5y NC2 through GS (B&D), BofA, JPM, Barclays, CA, CS, DB and MS.

  
  

• NAB yesterday priced a €1.5bn 3y Covered at swaps +25bps through Barclays, BNPP, Commerzbank, HSBC and NAB.

GBP new issues:

• EDF (Baa1/BBB) late last week priced £450m in 12y and £500m in 30y bonds at gilts +210 and 215bps, respectively. It is also sold €1bn in 9y and €1bn in 20y bonds at swaps +165 and 230bps. Leads on the two sterling tranches were BNPP, BofA (B&D), Barclays, Mizuho, MS, NatWest and SocGen.

SEK/NOK/DKK new issues:

• Jyske Bank has mandated Danske, Nordea and Swedbank to help it lead a 4yNC3 fixed or floating bond in one or more of SEK, NOK and DKK currencies.  

   

• The IBRD yesterday priced a NOK 2bn, 4.25% Feb 2028 FRN at NIBOR +100bps via DNB.