Basis: Widening fades; Hardcore issuers; Busy KfW

Less than merry go round
With more troubling First Republic news yesterday came another wave of risk-off moves in basis. That has reversed amid strong 2y EUR/USD flow.

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  • Widening fades; Hardcore issuers 

  • KfW looking to transport away cross-currency basis costs

  • Barclays: Well-paced SSAs set for issuance slowdown

  • Flow

  • New issues


Widening fades; Hardcore issuers; Busy KfW

With more slightly troubling stories about funding needs at First Republic bank yesterday came another wave of EUR/USD (and cable and JPY/USD, AUD/USD, NOK/USD etcetera) front end slumps in their respective bases. Today the merry-go-round of risk swung the other way.


The EUR/USD was the preferred conduit for yesterday's risk-off moves to be expressed, with the 3m dropping 6bps early doors yesterday to -29.5bps before partially recovering in the afternoon and then bouncing a further 2.875bps to reach -19.625bps.


Today saw a strong focus amongst issuers in the core issuance currencies, meaning that the cable basis market is slightly apathetic, while its risk-off move was further muted by the drive to regulate UK banks to within an inch of their lives since 2008, which makes UK banks seen as less prone than others to sudden losses. The 3m cable move was 2bps in the first break yesterday to -7.5bps, before since recovering to its current -6.625bps.


In JPY/USD the 3m basis went on a 4bps round trip to close last night little-changed and similar patterns – of bear-steepening led by front-end wobbles) were repeated around the basis multiverse as textbook reactions to risk events found little opposition in what is a slightly subdued basis landscape this week.


As First Republic recedes once more in people’s minds, the new issuance pressures are slightly more visible, with a very-active KfW appearing once more in EUR and also in USD today, where it is close to pricing a $1bn, short 2y bond at SOFR +12bps.


Ahead of the deal traders reported decent flows this morning in 2y EUR/USD at -29.5bps and to a lesser extent at -29.625bps (+1.625bps since Wednesday’s close) which is where it is currently pricing.


“The front-end has moved (higher) a fair bit on today’s risk-on switch, it’s been the busiest part of the curve with a lot of 2y at -29.5bps today,” said a basis swapper at an active market participant this lunchtime in London.


The basis swapper was open to the idea that some of the flow was down to KfW getting its hedging in ahead of the imminent pricing, adding too though that in terms of directionality “as well as the reversal of risk-off moves yesterday afternoon and today there is possibly some lingering BNS flow.”


Scotia priced a €2bn, 2y FRN at around 3pm London time on Wednesday, while (talking of Canadians) the majority of Canadian names among KfW’s trio of lead managers for its USD offering suggests strong interest for top names in USD among Canadian banks' clients.


Beyond the 2y sector of EUR/USD the basis swapper said there is little to shout about aside from those risk-driven ripples that fade the further they are from the 3m sector.


Cable is ‘dead’ with even the ultralong end seeming devoid of the 20-30y XVA-type flow that is particularly prominent when gilts go nuts. Which they haven’t done now for literally almost a week, when a ten-day, 40bps sell-off in 30y gilts peaked, since when yields have edged lower.


With Deutsche Bank managing to stamp on most remaining embers of the distrust it suffered following SVB, CS and First Republic bank problems at its quarterly results meeting today, it might just be that the particularly strong correlation between EUR/USD basis and news from US regional banks may start to fade. Though that is yet to be proven.


KfW looking to transport away cross-currency basis costs

KfW’s swap activity is also in the news in Risk today. The magazine reviews KfW’s efforts to use transport currencies to allow the German agency to post euro collateral against dollar-discounted trades in an effort to cut the capital and cross-gamma costs of trading cross-currency swaps through LCH SwapAgent.


Some small, short maturity test trades between KfW and counterparties Bank of America, Commerzbank, Danske Bank and Santander were announced at the end of March (see Total Derivatives). However, the article notes that some unnamed banks are wary of “unhedgeable” daily FX risk using transport currencies. And while KfW may be keen on the concept, it’s unclear if other end-users – and how many banks - are supportive.


Meanwhile even SwapAgent leaves to door open in the article to having “a few” standardized CSAs, such as euro CSAs, if there was” support from the market” rather than standardizing on transport currencies and dollar CSAs.        


Barclays: Well-paced SSAs set for issuance slowdown

Looking at the busy SSA primary markets in April, strategists at Barclays noted that the brisk month helped the market reach higher levels of issuance in EUR and USD than in 2022, year to date.


It notes that “SSA issuers well advanced in their funding programmes. Due to uncertain market conditions and volatile markets, many SSA issuers had postponed their transactions, resulting in busy primary markets in April when volatility stabilised and market sentiment improved.”


Looking at individual major European issuers it notes that the EC has raised 60% of its H1 23 funding target, the EFSF has funded half of its €20bn target for 2023, KfW has funded around 40% (and rising) of its 2023 plan of €80-85bn, and Municipality Finance has sold about 60% of its €8-9bn.


In short, none of the big guns are looking to spend Christmas 2023 scrabbling around for bond buyers. Looking ahead, said Barclays, “We think the pace of EUR supply should slow down. The past few weeks have seen very active primary markets with most big issuers coming to the market in EUR or USD. Next week attention will be focused on central bank meetings, with the Fed and ECB taking centre stage. Also, given larger issuers are well advanced in their FY funding needs, we could be entering a period of relative calm, at least until month-end.”



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


New issues


USD new issues:

  • KfW is pricing a $1bn Mar 2025 bond at swaps +12bps via BofA, BMO (B&D) and TorDom.


  • State Bank of India is planning a USD 5y at around USTs +185bps via Citi, Emirates NBD, HSBC, JPM, MUFG and Standard Chartered.


  • Italian government agency CDP (BBB/BBB) plans a USD 3y benchmark bond at USTs +215bps. Via BNPP, BofA, Citi, GS, HSBC, IMI-Intesa Sanpaolo, JPM, MS and SocGen.


  • Korean oil firm SK on (Aa3) plans a USD 3y Green bond guaranteed by Kookmin after meeting investors from Apr 27. Leads are BNPP, CA, HSBC, JPM, MUFG and StanChart.  


  • Hungary’s Eximbank Zrt. (BBB-/BBB) yesterday priced a $1.25bn, short 5y bond issue at USTs +280bps. Leads are ICBC, IMI and JPM (B&D).


  • Swedish Export Credit yesterday priced a $1.25bn 2y Global at swaps +31bps via BofA, DB, Nomura and TD.  Aa1/AA+.


EUR new issues:

  • Svenska Handelsbanken is close to pricing a €1.25bn 3y at swaps +53bps via BNPP, HSBC, MS, Handelsbanken and UBS.


  • Melbourne-based Telstra Group yesterday priced €500m of 8y bonds at swaps +73bps through BNPP (B&D), BofA and MUFG.

  • South Korea’s KEB Hana Bank yesterday priced €600m of 3y Social Covered at swaps +47bps through BNPP, Citi, CA (B&D), HSBC and SocGen.

  • Bank of Nova Scotia yesterday priced a €1bn 2y FRN at 3mE +43bps through DB, Lloyds, Santander and Scotia.