Basis: Engie lifts cable’s ennui as markets re-awaken

Trucks waiting 21 Dec 2020
After two weeks that already feel slightly like a dream, traders spy an awakening. Elsewhere, KfW and LCH SwapAgent present... Transport trades!

Start a free trial to read this article

Join today to access all  Total Derivatives content and breaking news. Already a subscriber? Please Log In to continue reading.

Or contact our Sales Team to discuss subscription options.

Get in Touch
Blurred image of Total Derivatives article content


  • Engie lifts cable’s ennui as markets re-awaken

  • KfW and LCH SwapAgent kickstart Transport; LCH’s basis boom

  • Citi: Widening shock in basis: Time to pay

  • Flows

  • New issues


Engie lifts cable’s ennui as markets re-awaken

After two weeks that already feel slightly like a dream, with diverse names like SVB, CS and Deutsche drifting in and out before disappearing (in some cases literally), the cross currency basis market found itself wide awake again this week, bristling with deals and innovation.


On the latter front, KfW and LCH SwapClear have announced basis swap-related innovation in the new world of Transport Currency trades (see below), and flow-wise, a revival in GBP and EUR cross-border issuance has got traders busy again.


One seasoned basis trader in London confirmed as much this afternoon. He said that “primary markets are opening up, led by BMO and ANZ in EUR and Engie in cable.”


He said that ANZ flows saw EUR/USD 2y trade as low as -26.75bps while the 3.25y BMO offering saw the 3y trade lower, to -26.75bps, down there in the flatlands of the EUR/USD curve. Both are now better bid but are as yet little-changed from those trading levels as the market tries to reverse a flattening move led by the very front end of the EUR/USD curve.


And the same basis swapper said of last night’s Engie deal led that “it’s safe to say it was swapped and 30y GBP/EUR basis traded down to -19bps (from -17bps yesterday morning), it’s now bounced back to -18.25bps.”  


These are the deals that caught the eye of the above trader but he said that despite the USD market remaining more attractive at the moment to domestic US issuers, elsewhere “I think we are through the eye of the storm. The short end is still stuck (in a roughly -20 to -25bps range in 3m) but I think still it has a little further to go (after recovering from -42bps two weeks ago).”


KfW and LCH SwapAgent kickstart Transport; LCH’s basis boom

KfW and LCH SwapAgent today issued a statement hailing the first ever Transport Currency trade between KfW and counterparties Bank of America, Commerzbank, Danske Bank and Santander.


KfW said it “has worked closely with LCH SwapAgent and its market participants to bring Transport Currency trades to fruition. The Transport Currency settlement methodology enables market participants to use EUR for daily margin payments on cross-currency swaps and benefit from standardised discounting and valuations. This important innovation leverages the unique footprint of LCH SwapAgent as a trusted third-party in the bilateral derivatives market as it develops solutions that increase standardisation and reduce risk.


Nathan Ondyak, Global Head of LCH SwapAgent, said: “It has been rewarding to work so closely with KfW all the way from idea generation, through to onboarding and finally, adoption. Transport Currency is a unique proposition for derivatives markets that we look forward to developing further in collaboration with market participants.”


Stephan Blanke, Head of Derivatives, KfW, said: “We very much welcome the establishment of… a novel solution to extend standardisation in cross-currency swap markets. KfW's funding and hedging activity is based on a broad diversification of business partners. Thus, it makes sense for us to support LCH SwapAgent in increasing liquidity and improving market access for all users of derivatives. It is also a valuable tool for KfW from a risk and pricing perspective." 


Additionally, a post last week from LCH SwapAgent said that BlueCrest Capital Management has joined the service as its first buyside client, doing an unspecified trade with Citigroup and Barclays to kick things off.


SwapAgent reported strong growth in its uncleared derivatives activity over the last year, which includes a large lump of cross-currency basis trade settlement. It said that its “service has continued to see impressive growth of its service. In 2022, it recorded a 130% year-on-year increase with over $7.5 trillion of notional registered since launch. Cross-currency volumes across the service reached record highs with $2.7 trillion of notional registered in 2022, including a 112% increase in JPY cross currency volumes.”


Citi: Widening shock in basis: Time to pay

Reflecting on recent events, strategists at Citigroup said this week that the widening move this month was "a perfect storm of a VaR shock for fast money accounts (who presumably were short outright duration and de-risked paid FX OIS positions), a fear of dollar scarcity and finally concerns around funding spreads for banks as evidenced by LIBOR/OIS widening.”


Storm now possibly over, Citi said that: “We continue to like paying the SOFR/TONAR basis although the outcome will of course rest on how the bank funding stress plays out.” Below are Citi’s key views on why it likes paying the basis:


  • “Foreign banks are unlikely to swap much more into dollars (they) are in a much stronger position, compared to small domestic banks, based on their high level of reserve holdings. Hence, we do not see the current liquidity challenges for small domestic banks spilling over to foreign banks – this limits the possible impact to the XCCY basis."


  • "XCCY and LIBOR/OIS widened significantly more than other stress indicators. We believe XCCY overreacted due to this stress being a financial one in nature, however, we believe this is an overreaction given foreign banks better positioning relative to small domestic US banks, as discussed above."


  • "Volatility may remain elevated for the coming weeks, especially given the uncertainty around the banking sector."


  • "There are risks that some foreign banks will shift issuance from US bonds back to Yen due to shifts in credit spreads, which could drive an additional $20bn of FX swapping in Q2. Presumably, this would hit the belly of the XCCY curve more so than the front-end."


  • "There remains significant uncertainty around the forward path of inflation and thus Fed policy. If the Fed is forced to continue the hiking cycle into later this year, there are added widening risks to the basis. Finally, we continue to expect ~$900bn of T-bill issuance after the resolution of the debt ceiling, mostly in Q4. This can still put significant widening pressure on the basis, especially if Q4 funding conditions worsen if banks are forced to reduce their G-SIB surcharge."


  • "Negative headlines can widen the basis in coming sessions, and March-end Treasury auction settlement can be negative for the USD liquidity… this may become an opportunity to enter outright paying.”



Basis trades on the SDR can be seen here: Total Derivatives SDR.


New issues

USD new issues:

  • Poland plans a two tranche USD benchmark offering consisting of a long 10y at about +145bps and a long 30y at around +185bps. Leads are BNPP, Citi (B&D), GS and JPM.


EUR new issues:

  • General Mills, a US food company, is pricing EUR 6y around swaps +145bps through Barclays (B&D), BNPP, Citi and GS.

  • Sweden’s Stadshypotek is pricing EUR 5y Green Covered around swaps +20bps through Barclays, HSBC, Nomura and SocGen.

  • Sumitomo Mitsui plans EUR 3-5y Covered through GS, BNPP, CA, Barclays, UBS and Daiwa.

  • Bank of Montreal is pricing a €2bn, 3.25y Covered Bond at swaps +28bps through BMO, BNPP, Commerzbank, CA (B&D), HSBC and ING.

  • Harley Davidson Financial Services is meeting investors on 28 March ahead of the sale of EUR 3y through Citi, GS, Lloyds and Mizuho.

  • ANZ has priced a €1.5bn 2y Covered at swaps +15bps through ANZ, DZ, NatWest, SocGen and UBS (B&D).


GBP new issues:

  • French energy company Engie late yesterday priced a £650m 30y 5.625% Green bond at gilts +187bps via Barclays (B&D), HSBC, JPM and RBC. Books topped £1.35bn.