Basis: Eyes on Easter after early EUR splurge

Stange Easter Bunny 8 Apr 2022
How quickly things change in this Brave New World. After a lull and a splurge in basis activity, a newly near-normal market eyes the Easter break.

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  • Eyes on Easter after early EUR splurge

  • BNPP: Watch out for dip in AUD/USD if RBA hikes

  • Flow

  • New issues:


Eyes on Easter after early EUR splurge

How quickly things change in this Brave New World of instant trading gratification. A week or so an alleged €5m CDS trade on Deutsche Bank was enough to stoke 2008-style moves in some markets after risk appetite had been softened up by events at SVB and Credit Suisse.


Today minds were drifting towards Easter holidays amid calm, quiet market conditions. The recent risk-off scare virtually shut down cross-border issuance (and most domestic issuance). The pause that was then followed by a glut of supply, domestically-driven in USD and across the board both in EUR and, in its own modest way, in GBP.


That wave of supply is fading. The fact that issuance in major currencies is still ahead of where it was for the first three months of 2022 despite the risk-off paralysis at times over the last few weeks is partly a function of the market mania that was the gift of the Liz Truss regime in the UK in Autumn, when markets had a stable start to 2023, issuers piled in to get ahead of the curve before the next unforeseeable drama. Smart.


The recent raft of issuance followed a not dissimilar pattern but was more short-lived, noted one long-suffering basis swapper today. “The market is in slowdown now,” said the trader. “Easter holidays start next week so while there was a lot of EUR supply recently and earlier this week even, its easing off now. EUR/USD basis went down a fair bit on the mostly EUR swapped issuance, now it’s bouncing back.”


Taking the 5y EUR/USD basis as a point of reference, it was at -20bps four weeks ago, hit -32.25bps on March 14, and has clawed its way back to as high as -24.25bps on Monday, before sagging again on swapped EUR issuance, and now bouncing once more in its relative absence. The 5y EUR/USD basis hit its most recent low of -28.25bps yesterday and is now -27.25bps.


The lack of cross-border USD issuance has been the glaring omission of the post SVB/CS/DB panic, and the above basis swapper has a straightforward explanation for this. “It’s cheaper (for EUR-funding issuers) to issue in EUR at the moment. Even in the short maturities (2y to 5y is traditionally the sweet spot), so, not surprisingly, they are issuing in EUR.”


The homogenization of issuance markets meanwhile continues to take its toll on the once feisty second-tier currencies. Despite Swedbank Hypo selling €1bn of 5y bonds yesterday, one basis swapper said the Scandi basis market had been completely dead in terms of issuance flow this week. 


Perhaps it is just a matter of time before all bonds are issued in Federation Credits and basis swappers are just a fond memory, like Blockbuster video staff or doctors on home visits.


But not yet, after Easter there will doubtless be another hectic burst of supply and swapping, and even today there were pockets of flow in 4y (where KfW is selling GBP bonds) at -16.125bps and 5y at around -17.75bps, while in 5y and 10y EUR/USD at around -27.625bps and -28bps respectively. 


BNPP: Watch out for dip in AUD/USD if RBA hikes

Strategists at BNP Paribas today took a look at the faraway AUD/USD cross-currency basis market, where all eyes are on April 4, and whether on that day the RBA will hold true to its hints at pausing, possibly even ending, its rate hike cycle that has seen the core Cash Rate Target rise from 10bps to 3.60% in about a year.


BNPP warns that a surprise hike would reflect in the basis market. It says:


  • “ The Reserve Bank of Australia is widely expected to pause its rate-hike cycle at the 4 April policy meeting, but if it delivers a surprise hike, we think the AUD/USD xccy basis could move in a negative direction."


  • "In 2022, there was a marked negative move in the basis on both the hawkish RBA surprise in May and the dovish one in October. We suspect the reason is the legacy of Australia’s quantitative easing in 2022, in which AUD/USD xccy basis price action resembled that of the USDJPY basis."


  • "While Australian banks now issue more domestic bonds relative to overseas’, we do not expect domestic bonds to replace overseas’ issuance.”


Expanding on these points, BNPP says that the resilience of Australian CPI prints means that “we would not rule out a surprise hike next Tuesday,” with the result that “we would expect the xccy basis to move lower (less positive or more negative) direction.”


It concludes that while QE may have resulted in more domestic AUD bond issuance, Australian banks continue to heavily utilize offshore funding. “Domestic and overseas bond issuance do not therefore appear completely interchangeable. The relatively large funding via overseas CDs suggests that Australian banks take advantage of relatively negative AUD/USD xccy basis at short maturities now, in contrast to the pre-2019 relationship (3m xccy was more positive than the 5y before 2019).”


That advantage, BNPP says, might grow in the event of a hike next week.



Basis trades on the SDR can be seen here: Total Derivatives SDR. The SDR now shows the broker/platform that the did the trade, where available. 


New issues


USD new issues:

  • Dutch development bank FMO (AAA) is close to pricing a $500m 2y at swaps +26bps through BofA, Daiwa, HSBC and JPM. Books topped $1bn.


  • Al Rajhi Sukuk yesterday launched a $1bn 5y sust. Sukuk. Leads RJHI, Citi, Enbr, GS, HSBC, JPM, KCIC, Standard Chartered. A1/A-. +110bps.


EUR new issues:

  • DBJ plans a 5y EUR benchmark bond issue following investor calls commencing today. Daiwa, Goldman and MS are leads.


  • Korea Housing Finance Corp plans a EUR 4y benchmark Social bond via B NP, Citi, HSBC, ING and Standard Chartered (B&D).


  • Swedbank Hypotek yesterday priced a €1bn, July 2028, 3.225% bond at swaps +18bps via CA, Deutsche, HSBC, LBBW and Swedbank.


  • MetLife Global yesterday priced a €600m, 5y bond at swaps +100bps via BNPP, BofA, Deutsche and Goldman.


  • The UK’s National Gas Transmission yesterday priced €550m of 7y bonds at swaps +130bps via BNG, Lloyds, MUFG, NatWest and RBC.

  • Securitas AB yesterday priced a €600m 4y at swaps +120bps through BBVA, CIC, Citi (B&D), Commerzbank, Danske, ING, SEB and UniCredit.

  • Harley Davidson Financial yesterday priced a €700m, 3y at swaps +205bps through Citi, GS (B&D), Lloyds and Mizuho.

  • Sumitomo Mitsui is pricing €500m (max) 3y Covered at swaps +45bps through GS (B&D), BNPP, CA, Daiwa, Barclays and UBS.

  • Westpac yesterday priced a €1.25bn 2y Covered at swaps +15bps through Barclays, BNPP, HSBC and Westpac.


GBP new issues:

  • KfW is close to pricing a £300m, 3.75%, July 2027 bond at gilts +58bps via BMO and Santander.


  • EDF on Tuesday priced a £99m tap of its bond 5.625% due Jan 2053. Lead is HSBC


CHF new issues:

  • Austrian bank BAWAG PSK has priced a 5y CHF 180m bond at SARON +20bpsz, via UBS.