USD Swaps: Bank CDS the latest attack vector as dollar demand jumps

Dollar market crash down line chart 13 Jun 2022
Bank CDS seem to be the latest attack vector with even Euro GSIB names sharply wider. Demand for expensive dollars has jumped and SOFRs are +30 ticks.

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  • Bank CDS the latest attack vector

  • EUR/USD basis plunges after expensive Fed dollars snapped up

  • Callables and Formosas: IADB 20y NC5

  • New issues


    Bank CDS the latest attack vector

    Big moves in single name bank CDS over the last 24 hours have been a standout feature of the latest phase of financial turmoil with Deutsche Bank spreads off the wides but still indicated +26bps alongside an 11% slump in the shares. Barclays and UBS CDS are +14-17bps, Commerzbank are +9bps and BNP Paribas are +8bps. The pain is being felt beyond the bank sector with wider share indices down over 2% in Europe while S&P futures are 1% into the red, while oil futures are $2.5 lower. And with still no sign of a plan for halting the slide at First Republic - or smaller banks generally - FRC shares are down 5% again.  


    No wonder that the Treasury curve is bull-steepening on the back of a 25bp drop in 2y yields to 3.58% versus a 13bps rally in 10y to 3.30%. SOFR futures are +20bps in Jun23 and +30bps in Dec23.  And swap spreads are tighter led by 2s at -3.25bps (-1.75), 5s at -21.25bps (-0.50), 10s at -29.75bps (-0.25) and 30s at -74.5bps (unch). Swap volumes above average across the curve but strongest in the 5y and 10y buckets.


     EUR/USD basis plunges after expensive Fed dollars snapped up

    With even GSIB banks under pressure over the last 24 hours, its no surprise that funding indicators have also started flashing amber again. First IMM FRA-OIS is 7bps wider at 48.8bps and EUR/USD 3m cross-currency basis has plunged by 13bps to -32bps (compared to a recent post-SVB low below -50bps). EUR/USD 1y basis is down almost 5bps to -31bps. And the iTraxx Europe IG index is +5bps wider today (versus +2bps for CDX IG) while cross-market (and domestic FIG) bond issuance remains on hold.


    Subdued use of the Fed’s central bank liquidity swap lines was seen by many  as a positive feature of the current turmoil. However, research from Deutsche Bank today suggests the absence of customers for the facility may be “masking the true extent of global dollar demand” as another, expensive line of liquidity was tapped instead. The bank explains:


      “In the Fed's latest H.4.1 release, two datapoints jumped out. First, the FIMA repo facility saw a record increase to $60bn from $0 in the previous week. This facility enables foreign central banks to borrow dollars against their securities held in custody at the New York Fed, offering a comparable rate to the liquidity swap lines but without disclosing the borrower's identity. Since the increase matches the per counterparty limit of the facility, it is conceivable and even likely that a single counterparty was responsible for the entire borrowing.


      “Secondly, foreign-owned Treasuries held in the Fed's custody fell sharply by $76bn. This marked the largest weekly decline since March 2014, when Russia was thought to be behind the shift in response to Western sanctions and a falling ruble. Movements in the Fed's FIMA facility and custody holdings suggest that the central bank either lacked access to the swap lines or opted to raise dollars anonymously via repo and by liquidating their securities. In case of the latter scenario, protection of identity may have been a factor to help maintain public confidence and prevent further market turmoil.”



    Callables and Formosas: IADB 20y NC5

    • IADB sold a $50m 20y NC5 zero coupon callable (non-Formosa). The EMTN matures Mar 2043, is callable annually from Mar 2028, and has an estimated IRR of 4.66%. Led by JPM and announced Mar 24. 


    New issues

    • Deutsche Bank has called its $1.5bn sub Tier 2 note 4.296% due 2028 on May 24, 2023.