Basis: Flash flood? Market eyes rapid normalisation

Floodgate 9 Nov 2020
Signs of rapid normalisation abound in basis as market participants dry out after what may prove to be just a flash flood.

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  • Flash flood? Basis market eyes rapid normalisation

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    Flash flood? Basis market eyes rapid normalisation

    If the seriousness of market panics can be gauged by their impact on cross-border bond market activity then the post-SVB market panic could be seen as very serious indeed. After all, this market has been on ice since Thursday.


    But, with shares in First Republic Bank surging 61% at the opening of trading on the NYSE today, and equity indices across the board rallying 1-2%, traders on bond desks -- and basis swappers -- could be forgiven for expecting a busier latter part of the week.


    A s one long-standing basis swapper said this afternoon in London “this moment may already be passing.”


    The reaction to the panic moves in core government bond and equity markets on Friday and yesterday was, he said, “pretty textbook, first breaks fell a lot as you’d expect but flows were pretty thin, USD liquidity in the market is ultimately still pretty strong.”


    And if anyone is looking for hopeful signs of an instant normalisation the first break of basis is a good place to look. He said as recently as this morning there were flows at -42bps (and it briefly touched -52bps) in 3m EUR/USD, followed after today's US CPI data headlines by flows at -22bps. Now the first break is being quoted at -19bps, not all that far from the -10bps level it was meandering along at before all this SVB news broke.    


    “CPI was more-or-less on target which already feels like it might have broken the spell,” of the risk-off panic that 24 hours or so ago was threatening to engulf markets completely.


    Key points on the EUR/USD curve did though see position-hedging flows, he added, noting 10y flow prominent at around -31bps yesterday, before trading again this morning at -28.5bps and now being quoted at -27.5bps.  


    And there were the typical XVA/gamma hedging type flows in the long end, especially in EUR/USD in 30y. The above swapper said that after trading early yesterday at -11bps, the 30y went through a few times at and around -17bps, though not in massive size, late yesterday. But in line with the more risk-sensitive front-end, the 30y EUR/USD basis tested the downside early this morning before starting to bounce, hitting -19bps but rising now to -15.5bps, a mere 3bps below where it was in the middle of last week.


    And looking at the rest of this week, the trader said that “this looks like it might just be remembered as a flash flood for the market, if it continues to stabilize we should see issuance come back tomorrow, especially with CPI out of the way.”     


    In cable though, the timing of the UK Budget means that tomorrow may be too early for a comeback in GBP issuance at least, although the cable basis market has been even quicker if anything to embrace normalisation than EUR/USD. After closing at -13.25bps last night, the first break dipped to -22bps this morning before storming back to -5bps at the time of writing, which is just 5bps below where it was on Thursday.  



    Basis trades on the SDR can be seen here: Total Derivatives SDR. The database now shows platform or broker for every trade, where available. 



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    • QNB Finance yesterday priced a $100m, SOFR +135bps FRN at par via ANZ.