USD Swaps: Risk-on hits front end; ISDA speeds towards final LIBOR hurdle

Sprinters start blur 17 Jan 2023
As strategists reassure investors that last week's Deutsche Bank sell-off was built on nothing risk-on is holding sway, ISDA eyes final LIBOR hurdle.

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  • Risk-on holds sway as front end hit in strangely calm market

  • ISDA on the run towards the ‘final LIBOR hurdle’

  • Callables and Formosas: BMO, MS

  • New issues


    Risk-on holds sway as front end hit in strangely calm market

    With strategists busy over the weekend publishing reports that emphasized the lack of rationale behind Deutsche Bank’s share price wobble last week, while highlighting the German giant’s recent improvements in profitability, that particular mini-panic seems to have evaporated, allowing equity markets to rally and bond yields to rise at the start of this final week of March.


    Dweutsche Bank shares are up 3% at around €9 currently, versus a low of €8 on Friday and a pre-wobble level of €10. CDS 13bps tighter tighter at 200bps.


    At lunchtime in London the 10y UST yield is +9bps at 3.465%, outperforming gilts by 3bps and marginally underperforming Bunds, while the 10s/30s UST curved is at 23.5bps, which is 3.3bps flatter after a strong bull-steepening move on Friday, while 2s/10s is -9bps at 48bps after an impressive 18bps sell-off in 2y yields that has returned levels to where they were on Thursday prior to the mysterious Deutsche Bank sell-off. SOFR futures are as much as 24 ticks lower in the back whites and the reds.


    Swap spreads are wider cross the board this morning, with the 2y +1bp at 0.5bps, 5y is +1.25bps at -20.5bps, 10y is +1.25bps at -28.75bps and 30y is +0.75bp at -74.125bps. Euro and sterling bond issuance has picked up today led by corporates, utilities and the EU, but news is awaited on the USD new deal pipeline.


    A quiet Monday so far will not be stirred up by much US data beyond the Dallas Fed Manufacturing index, with the only scheduled event of interest to the UST market today being a speech later today from Fed Governor Philip Jefferson.


    Reports that the Fed is considering whether to extend its emergency lending facility with the aim of supporting First Republic helped S&P futures, which are +0.7%, roughly in line with rallying European bourses so far. FRC shares are +23% in premarket trading. In fact, with risk-on holding sway and new issuance still at a premium, USD fixed income has returned to risk-on bear-flattening. 


    ISDA on the run towards the ‘final LIBOR hurdle’

    ISDA CEO Scott O’Malia today offered a short update on preparations for the final publication of the USD LIBOR fixings on June 30.


    O’Malia reminds that first, firms need to prepare for the planned conversions of cleared LIBOR trades at CME Group on April 21 (link) and at LCH in two tranches on April 22 and May 20 (link). In addition, Eurex will convert its USD LIBR trades starting on April 21 (link).


    ISDA’s chief notes that many firms will rely on its fallbacks to make the switch to SOFR, as with the previous transitions for GBP, EUR, JPY and CHF LIBORs. However, he points out that the use of a two-day backward shift in the published USD LIBOR fallback rate and the inclusion of a spread adjustment differs from the standard SOFR overnight index swaps that dominate the US interest rate derivatives market today. O’Malia explains:


      “SOFR overnight index swaps typically have a two-day payment lag without a spread adjustment and are calculated by one of the counterparties at the end of each period. The central counterparty conversions of cleared US dollar LIBOR derivatives will also generally result in SOFR overnight index swaps with these standard conventions to ensure the resulting transactions are fungible with existing cleared SOFR derivatives.


      “These variations can be managed and shouldn’t pose a problem, but firms do need to be aware of possible differences in conventions and make the necessary modifications to their systems and processes. Some market participants may choose to bilaterally negotiate changes to their contracts over time to increase consistency. Similar negotiations may also occur for derivatives hedging cash products that fall back to term SOFR, a separate benchmark based on transactions in the SOFR derivatives market.”


    Callables and Formosas: BMO, MS

    • Bank of Montreal sold a $50m 15y NC9 zero coupon callable/puttable (non-Formosa). The EMTN matures Mar 2038, is callable annually from Mar 2032, and has a put in Sep 2023. Estimated IRR 5.17%. Led by BMO and announced Mar 24.


    • Morgan Stanley sold a $30m 15y NC3 fixed callable (non-Formosa). The EMTN matures Mar 2038, is callable annually from Mar 2026 and pays a 5.70% coupon.  Self-led and announced Mar 24.


    New issues

    • Korea National Oil is close to pricing a two-tranche benchmark USD bond consisting of a 3y at USTs +120bps or so and a 5y at around +135bps. Via Citi, CA, HSBC, KDB, Mizuho and UBS.