Basis: USD glut drives supply as cable comes in from the cold

UK Five pound note with King  Charles 17 Jan 2023
The cross-currency swap market has kept a-ticking over this week, driven by strong USD demand. GBP eyes a warmer future.

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  • USD glut driving supply but spreads to clamp down

  • GBP: The currency that came in from the cold

  • Flow

  • New issues


USD glut driving supply but spreads to clamp down

The cross-currency swap market has kept a-ticking over this week, driven largely by some pretty lumpy USD deals from an array of usual suspects, and a few less usual, supported by some value-driven EUR offerings and the occasional GBP cameo.   


Happy-sounding swappers said today that their market was sensibly busy, settling into a steady rhythm of issuance while core curve points in EUR/USD are showing signs of settling into a range after a prolonged period of tightening.


For example, the 5y EUR/USD has travelled from -36bps in late October to -21bps today, but for the last month has traded in a fairly tight -23/-20bps range. One long-suffering swapper said this lunchtime in London that “basis has tightened on the back of there being a lot of dollars in the system.”


“Because of federal debt ceiling regulations the US Treasury hasn’t been able to sell its usual amount of T-bills so investors have been parking their money at Chase or wherever, so it’s sloshing around in the system which ultimately drives tighter (more positive) EUR/USD cross-currency bases, led by the front-end". Indeed, 3m EUR/USD has gone from -70bps in October to -18bps at year end and -7bps today.


Thus where there have been decent lumps of issuance, the basis swapper said, they have largely been in USD (hence EBRD, HSBC, L-Bank, Sumitomo, Morocco, Norinchukin and others all heading to USD to do benchmark issues in the last day or so). US issuers meanwhile, are loathe to stray away from USD when demand is so ripe for the picking.


But with the EUR/USD basis now at elevated levels that favour swapping from EUR to USD the move higher is approaching, or possibly at, its peak. In the medium-term, he added, “there probably isn’t much of a theme beyond the basis being driven by the front-end and liquidity continuing to be a significant driver of issuance.” But the big push higher of recent months, he reckons, is close to its natural ceiling.



GBP: The currency that came in from the cold

If January this year was a month of modest but unexpected hope in developed markets, and February marked a return to broad-based inflation anxiety, March seems to have started on a note of renewed hope, at least for participants in the GBP rates market.


After its shameful descent into chaos in the Autumn, the UK government has established something resembling functionality this year. One promising sign of this has been its progress on getting a new Northern Ireland deal signed off with the EU.


According to the above basis swapper this might prove good news for GBP issuance by non-UK borrowers in the months ahead, if not straight away.


At the moment he said “cable issuance remains sporadic at best. When it comes it is taken down well for a while as a few people have a go, then it stops again.”


However, he contended that “the Northern Ireland agreement could finally usher in a slightly less deranged relationship with the EU, so long-term, or at least by Q2 or Q3 2023, we could see the pound become a more stable entity, both as a currency and as an issuance currency of choice. It could be time for it to come in from the cold.”


As if to illustrate this point, cable flows (admittedly not always massive) were noted by the swapper in 2y at -8.75bps, 7y at -16.75bps and 10y at -16.5bps, while on the issuance front Bank Nova Scotia popped up with a large 4y FRN today. And where one Canadian issuer pops up, others often emerge shortly afterwards.


In terms of directionality today, cable is unusually unchanged at most points except in 30y which is -0.375bps, while in EUR/USD the 3m basis is +0.75bps with the curve flattening smoothly and gently down to 30y which is currently -0.125bps at -12.875bps.




Basis trades on the SDR can be seen here: Total Derivatives SDR. Note that the TD SDR now shows the broker, SEF or platform for the trade, or whether it was bilateral. 



New issues


USD new issues:

  • EBRD is close to pricing a USD 5y Global at SOFR +31bps via Daiwa, Goldman, JPM and TorDom.


  • L-Bank is close to pricing a $2bn, 3y bond at SOFR +26bps via BMO, Deutsche, JPM and RBC.


  • Sumitomo Corp is close to pricing a $500m, 5y at +125bps via BofA, Citi and Goldman (B&D).


  • Norinchukin plans a USD 5y Green Bond at USTs +140bps via Citi and JPM (B&D).


  • Morocco this morning priced a $2.5bn two-tranche bond split evenly between a 5y at USTs +195bps and a 10.5y at +260bps via BNPP, Deutsche, Citi and JPM.


EUR new issues:

  • HSBC Bank PLC yesterday priced a €870m, 2-year FRN at EURIBOR +40bps via HSBC.


GBP new issues:

  • Bank Nova Scotia is close to pricing a £1.25bn 4y Covered FRN at SONIA +62bps via Barclays, Lloyds, Nomura, RBC and Scotia.


SEK/NOK/DKK new issues:

  • The African Development Bank today priced a NOK 1bn 5y Green Bond at swaps +7bps via SEB.