Basis: Pendulum swings as market ticks over

The cross-border new issuance pendulum has swung firmly in the direction of EUR versus USD as debt ceiling hopes flatten EUR/USD.

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  • Pendulum swings as market ticks over

  • Barclays: Japanese insurers’ FX hedging and the JPY/USD basis curve

  • Flow

  • New issues


Pendulum swings as market ticks over

The cross-border new issuance pendulum has swung firmly in the direction of EUR versus USD so far this week as basis swap activity got something of a lift by London and New York’s re-openings after three-day weekends, although basis swappers here this lunchtime said that activity is ticking over, rather than booming.


One such trader summed up activity so far today by saying “the pendulum has swung to EUR (versus USD) issuance and there have been a few deals there and there’s been some curve flattening on the back of hopes for the debt ceiling deal.”


The risk-on element of the flattening nudge today (3m30y EUR/USD basis is 1.5bps flatter so far today) is being driven unsurprisingly by a tightening of EUR/USD basis in the very front end, where the 3m is currently +1.375bps at -22.375bps.


In the long end, where 30y EUR/USD is -0.125bps (and 30y cable is -0.625bps), the moves are harder to call. “The long end (of both EUR/USD and cable) is better offered again and has been underperforming for quite a few weeks now. There’s not one factor behind that, last week was a mixture of stops and XVA, and it’s probably the same so far this week. It’s certainly not flow,” said the above basis swapper.


This seems to be particularly true in cable today where a number of decent-sized 20y and 25y trades have printed at -34.375 and -38.75bps respectively as gilts stage another determined underperformance after a standout run of weakness last week.


As for the front-end, the trader said that while the knee-jerk risk-on reaction will continue to be characterized by a move less negative in 3m EUR/USD, in the slightly longer-term the impact of an agreement, if one is to be signed off, on T-bill issuance may ultimately have widening implications for front-end EUR/USD basis. Just not yet. For more detailed T-bill talk see Total Derivatives.


And in terms of basis activity today the above swapper said that while last week saw strong EUR/USD issuance flow concentrated in and around the 5y sector and driven by USD supply (most prominently Thursday’s $4bn, 5y KfW offering) dominated basis swap directionality. So far today though, what flows that have gone through have been been sprinkled across the curve, with the exception of that concentration of long-dated cable trades.


All-in-all it has been a pretty calm start to the week in basis, but as that issuance pendulum happily swings from the west of the Atlantic to the east, swappers – like everyone else – will continue to monitor US headlines lest alarm bells suddenly start blaring out in Washington.


Barclays: Japanese insurers’ FX hedging and the JPY/USD basis curve

Following half-yearly results published by Japanese life insurers for the period Oct 2022 – Mar 2023, strategists at Barclays took a look at their shifting investment and FX hedging patterns, and how they may impact spot FX and cross-currency basis markets.


Barclays said that “Life insurers further reduced their foreign-currency asset investment and FX hedging in H2 FY22. Japan’s 11 major life insurers had foreign-currency asset holdings of JPY56.7trn at end-FY22, the lowest level in five years, after reducing by JPY4.3trn in H1 and JPY8.3trn in H2.”


“FX hedges on these holdings (FX forwards and currency swaps) saw an even steeper decline with reductions of JPY2.3trn in H1 and JPY10.6trn in H2. As a result, FX hedging ratios dropped from 58.8% at end-September to 48.8% at end-March, the lowest level since 2008. By currency, the hedging ratios saw especially steep declines for USD (49.8%) and AUD (42.3%) where rate hikes significantly increased FX hedging costs, while actually rising for EUR.”


According to Barclays “investment conduct by life insurers could continue to tighten short-tenor xccy basis, support USDJPY spot and richen risk reversals. The deterioration in FX-hedged foreign bond carry due to the rate hikes of overseas central banks has reduced foreign bond holdings, lowered FX hedging ratios, increased the utilization of options and sustained credit investment, a trend that is likely to continue again in FY23.”


“FY23 life insurer investment plans indicate that most major insurers continue to shift funds from FX-hedged foreign sovereign bonds to JGBs, FX-unhedged foreign bonds and overseas credit. Reductions to FX-hedged foreign sovereign bonds and hedging ratios put tightening pressure on short-tenor USD xccy basis, while increases in credit investment point to widening/flattening of medium/long-tenor xccy basis, but we believe the overall trend in Samurai bonds and overseas lending will likely serve to ease basis curve flattening pressure. An increase in FX-unhedged foreign bonds and FX option utilization will continue to push up on USDJPY spot and cause risk reversals to richen.”



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


New issues


USD new issues:

  • TorDom plans a USD 3y Covered Bond at around swaps +75bps via Citi, Lloyds, Scotia, Standard Chartered and TorDom (B&D).


  • Bank of Montreal is preparing USD 3y and 3y FRNs at around Treasuries +145bps and SOFR equivalent. Leads are BMO (B&D), Citi, GS, MS, Lloyds and WFS.   


  • KEXIM plans a USD 10y bond at around USTs +120bps via Citi (B&D), CA, HSBC, ING, JPM and SocGen.


EUR new issues:

  • MUFG is pricing €500m  8y NC7 around swaps +195bps through MS and MUFG (B&D).

  • Kexim, Export-Import Bank of Korea, is pricing EUR 3y around swaps +37bps and 7y Green around swaps +77bps through Citi, CA, HSBC (B&D), ING, JPM and SocGen.


  • FAB plans a EUR 5y Green bond via Citi, CA, FAB, HSBC and StanChart. 

  • Zuercher Kantonalbank plans €500m (max) 6y NC5 Bail-in bonds after investor calls on 30 May through BNPP, DB and UBS.


  • Hong Kong is preparing USD,  EUR and CNH bonds after meeting investors from May 30. Leads for the EUR tranche are CA, HSBC, Citi and JPM.  


  • Bank of Montreal is close to pricing a €1bn 2y FRN at around 3mE +45bps through BMO, BNPP, DB, Natixis and Nomura.


GBP new issues:

  • BMW International Investment BV is close to pricing a £350m 3-year, bond at gilts +110bps via HSBC (B&D) and NatWest.


CHF new issues:

  • Swedbank today priced a CHF 160m, 5y Green Senior Non-Preferred Bond at SARON +100bps via Deutsche and UBS.


AUD new issues:

  • CCPIP Capital sold AUD500m in 4.1% September 1, 2026 bonds at ACGBs + 80.25bps.