Basis: Some F/E pressure; AT&T weighs; EDF supports

Euros dollars basis
As clouds from the US regions return to blot out the sunshine, so basis swappers refused to panic amid lumpy new issuance. Barclays eyes the ceiling.

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  • Some F/E pressure; AT&T weighs; EDF supports

  • Barclays: Mind the low ceiling…

  • Flow

  • New issues


Some F/E pressure; AT&T weighs; EDF supports

As the disappearing clouds of US regional banking risk suddenly change path and start returning to ruin everybody’s previously sunny day, cross currency swappers said that while this has added to dips in the front-ends of core basis markets, new issuance flow has been the big driver today.


Aside from that modest slide by major stock indices (with the Dow leading at -1%) and what feels like a disproportionate fall in bond yields ( -12.5bps in gilts, -11.5bps in Bunds at their earlier lows), the other big headline took the form of the BOE’s 25bps hike, but the lack of surprise saw it add just a bit to an existing front-end sag in cable.


Currently the 3m cable basis is -1.25bps at -9.5bps, where it has sat quite happily since lunchtime in London, while the EUR/USD first break is expressing slightly more anxiety about the US small-town banks, and is currently -3.625bps at -22.875bps.


But it is to good, old-fashioned, new issuance flow that swappers looked to for colour today. In particular the hefty-looking plans for €3.25bn of issuance from US behemoth AT&T in and around the 2y, 8y and 11y maturities...


One seasoned trader told Total Derivatives this afternoon that the news of the planned sale, which is close to being priced, was followed by hefty EUR/USD offers. “AT&T was the big one today and the announcement saw the 10y sector trade down to -31.75bps, before recovering to -30.75bps now, with downwards drag seen in neighbouring maturities,” he said.


Looking at the overall issuance picture the basis swapper noted that there’s a lot more EUR supply (see new issues below) noting that “EUR issuance is just winning out because of RV versus other cross-currency issuance sectors… spreads are working in favour of EUR.”  


Nonetheless in what felt like a proper old-school day of basis activity, there was some resistance from the plucky USD sector, led by Dutch champions BNG, which has launched a $1.5bn, 5y Social bond at swaps +45bps.  


“There’s been a broad shift lower in EUR/USD, which has weighed on cable too, led by EUR issues, but there’s also a big USD one from BNG which has limited the dip in the belly of the EUR/USD curve,” he noted. Currently 5y EUR/USD is -0.75bps at -30.5bps having bottomed out earlier at -29.5bps.


News of a planned EDF multi-tranche USD bond issue also kept the curve from sagging too much, while plans for Maple bond issues from a number of potential borrowers are expected to keep CAD/USD basis swappers on their toes in the days to come.


Barclays: Mind the low ceiling…

Strategists at Barclays said today that the annual US debt ceiling battle that is warming up in Washington right now is a potential source of volatility in the cross-currency basis market.


Focusing largely on JPY/USD basis, Barclays said that “The US debt ceiling issue could cause volatility in xccy basis, mainly via the risk-sentiment channel. Increasing concerns around a potential US debt ceiling impasse this year have yet to drive any significant volatility in xccy basis. However, as we approach the x-date (the point where the US government can’t pay its T-bill obligations, likely between Jun 1 and late July), we could see widening pressures emerge on xccy basis spreads, especially if broad risk sentiment turns sour.”


It notes that during past debt ceiling dramas, basis widened sharply in 2011, while remaining stable in 2013. Barclays said that “2011 saw 3m xccy basis widen 5-10bp in the week before the eventual passage of the resolution bill on 1 August, which drove some relief tightening, but a US credit downgrade by S&P on 5 August and the resultant risk-off moves caused a much sharper widening in both JPY and EUR.”


“On the other hand, xccy basis remained broadly stable in October 2013 despite the partial federal government shutdown caused by the impasse. The JPY basis widening at end-September was likely due to seasonal Dec turn effects as it reversed towards the new year rather than at the resolution of the debt ceiling issue in mid-October (as is also evident by the stability in 1m basis through the fall).”


This time though, contends Barclays, “Weak USD funding demand suggests any widening pressures are unlikely to persist. While the US debt ceiling issues pose some risk of sharp widening depending on how risk sentiment fares, USD funding demand from Japanese investors are declining as FX-hedged USTs turned into a large negative-carry asset amid aggressive Fed hike last year."


Indeed, it concludes, “Life insurers’ FY23 investment plan indicates that they will shift their asset allocation from FX-hedged foreign sovereign bonds, which tends to be hedged with short-tenor FX swaps (eg, 3m) to superlong JGBs, FX-unhedged foreign bonds, and foreign credit assets. A reduction in USD funding suggests that widening pressures from the demand side will remain muted. Additionally, expectations for eventual BoJ policy changes… could also spur some payer interest leading up to the meeting.”



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


New issues


USD new issues:

  • BNG Bank has launched a $1.5bn 5y Social bond via CA, Citi (B&D), Daiwa and RBC.  Swaps +45bps.


  • France’s EDF said today that it has mandated BofA, JPM, SocGen and Wells Fargo to arrange investor calls May 11-12 ahead of a multi-tranche USD bond issue, possibly followed by a CAD deal via BofA and RBC.


EUR new issues:

  • AT&T is close to pricing €1bn long 2y, €1bn 8y and €1.25bn long 11y bonds at swaps +40, +110 and +140bps, respectively. Leads are CS, DB (B&D) and MUFG.


  • Ohio-based bottle-maker O-I Glass Inc is preparing €500m 5y NC2 and $500m 8y NC3 bonds. Leads on the EUR tranche are CA, JPM and WFS (B&D). Price talk mid-6% and mid-7% respectively.


  • Melbourne Airport plans a EUR 10y through BNPP, Citi and GS.


  • Swedish telecom Tele2 is pricing a €500m 6.5y at swaps +93bps through CA, DB, ING (B&D) and Nordea.


  • SpareBank 1 Boligkreditt is preparing a €750m 7y Green Covered bond in the region of swaps +26bps through Deka, DB, ING and Nordea.


  • Danske Mortgage Bank today priced a €500m, 3.125% short 4y Covered bond at swaps +12bps via ABN Amro, BNPP, Danske (B&D), Natixis and UniCredit.


  • SEB yesterday priced a €1.75bn 2.5y Covered bond at swaps +5bps. Leads are Commerzbank, HSBC, NatWest, SocGen, Santander and SEB.


GBP new issues:

  • Council of Europe yesterday priced a £50m tap of its 0.75% July 2027 bond at gilts +38bps via Deutsche


AUD new issues:

  • Ontario Province added via TD Securities AUD35m to its existing 2% October 3, 2034 Kangaroo bonds at ACGBs + 83.25bps. The new size of the line is now AUD355m.


CHF new issues:

  • Nordea Bank has priced a CHF 300m, 2.49%, May 2028 bond at par via UBS.


  • Kommunekredit today priced a CHF 225m, 1.625%, Jun 2030 bond at SARON -116bps via BNPP and Deutsche.


  • Credit Agricole Home Loans today priced a CHF 280m, 1.825%, May 2028 bond at par via Credit Agricole, Deutsche and UBS.