Basis: Issuers dive through window; Ultra long cable mystery

Dive 10 Jun 2020
Basis swappers look at the motivation behind heavy issuance, front-end EUR/USD and mysterious basis flattening led by 30y cable.

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  • Issuers dive through window in uncertain world

  • Ultra long cable mystery

  • Flow

  • New issues:


Issuers dive through window in uncertain world

A couple of themes continue to dominate the cross-currency basis market this week, namely the US debt ceiling agreement and the heavy flow of issuance in USD, GBP but especially in EUR (though much quieter today), that has kept basis swappers on their toes these last couple of weeks.


Summing up what’s going on in basis, and in fixed income generally, one basis swapper in London said, "If anyone says they know what’s going on they are a liar. A couple of months ago rates everywhere were coming down as the peak in rates was seen to be approaching. Since then there’s been a massive reversal but no one has a clue what will happen next.”


As a result, the pressure on bond issuers to raise funds when they can is more intense than ever. “We’ve got the Fed and the ECB next week, the Bank of England the week after. So given the backdrop in terms of rates uncertainty if you get an opportunity to issue you want to take it now, before the next SVB comes along or until central banks muddy the waters again.”


But not all recent cross-market issuance has been visible in basis. The above trader said that issues from KfW (a $5bn short 3y on Tuesday) and others in USD this week haven’t yet been reflected in basis flow. Wednesday’s $1.5bn deal split between 5y and 10y from National Grid is thought to have been swapped.   


Despite considerable US interests, especially in electricity generation and transmission in New England, National Grid is very much a UK registered and focused company, “I haven’t seen the flow myself but I’d assume they would have swapped back to GBP as they have in the past. If they then need to assign funds to specific projects elsewhere then they’ll just swap back again as required,” said the basis swapper. 


And looking at the question of front-end EUR/USD basis, the same basis swapper noted that since the risk of the US running out of money in the absence of a debt ceiling agreement appeared once again in March, the 3m basis has failed to fully recover, despite the debt ceiling agreement seemingly being made over the last week or so.


The 3m EUR/USD basis plunged from -6bps to -43bps in March, and has only recovered to -21.75bps at the time of writing. “The move in the front-end hasn’t fully unwound, it might just be because of central bank uncertainty with hawkish noises from central bankers being accompanied by signs at last of a slowdown in the data.”


Strategists at JP Morgan offered one opinion on the short-end of the EUR/USD basis curve this week, saying that they recommend people, “Keep receiving 1Yx1Y €STR/SOFR cross-currency basis on expected support from large-scale increase in US T-bill issuance and some medium-term support from expected relative dis-inversion of the SOFR curve versus €STR.”


And in terms of flow today, there has been a lot of 5y EUR/USD at -29.75bps and a little bit either side of that point. 10y EUR/USD has been active at and around -31.5bps, as well as at -30.5bps or so in 7y. Directionally both EUR/USD and cable are slightly less negative today, trading 0.125bps to 0.25bps higher in both markets, with 3m EUR/USD leading the way with a 1.25bps move less negative to  -21.75bps.


Ultra long cable mystery

One thing that us increasingly baffling basis swappers this week is the move in ultralong EUR/USD and, especially, cable basis swaps. Both curves have flattened across 3m/30y over the last two weeks, with EUR/USD flattening 3bps (as 30y dropped to -19bps) to +2.75bps and cable flattening 2.25bps to -30.5bps.


It is the cable move that has caught the eye more though, partly because there is more flow there, especially this week, and partly because 30y cable, at -41.25bps, is trading at new lows, even lower than the -38.5bps achieved during the Truss mini-reign last Autumn, and fully 35bps lower than it was at the start of June last year.


One basis swapper said, “Usually its quite easy to find a story to explain long cable basis moves, but not this one. It’s clear from talking to investors that people are re-allocating back into long GBP assets (such as gilts) after fleeing to USD and elsewhere in the aftermath of Trussanomics.”


“That reallocation, focused in the long end, should drive cable basis curve steepening, but instead the back end has become very inverted amid huge 20-30y cable basis receiving flows.”


“It makes no sense,” he added. “It isn’t gamma flow because it’s much too directional for that, but it’s impossible to find a sensible explanation.”


In the last 24 hours the 20y cable basis has traded at -34.5 and -34.75bps, 25y has traded at -38.875bps twice, and 30y has traded at -41.625 and, most recently, -41.25bps. While down on levels of activity at the start of the week, for ultralong cable this is still a lot.



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


New issues


USD new issues:

  • EDF plans a USD perpetual NC10y bond issue at around 9.5% via BofA, BNPP, Deutsche, MUFG, SMBC and Standard Chartered.


  • Finnish financier Finnerva plans a $1bn, 5-year, SOFR +48bps or so bond via BAML, Citi, JPM and TorDom. Expected today.


  • Swedbank yesterday priced a $1.25b 2-part ($850m 3y fixed and $400m 3y FRN). Leads BofA, Citi. GS, JPM and WFS.  Aa3/A+/AA. +125bps, SOFR +138bps.


  • Norway’s Aker BP (Baa2/BBB) yesterday priced a $1.5bn 2-part ($500m 5y and $1bn 10y). Leads Citi, CA, DNB, ING, JPM and MUFG. +170bps, +225bps.


  • New Zealand’s ASB Bank (A1/AA-) yesterday priced a $650m 3y. Leads BofA, Citi, CBA and TorDom. +115bps.


  • National Grid yesterday priced a $1.5bn 2-part ($700m 5y and $800m 10y). Leads BofA, GS, MIZ and WFC.  Baa2/BBB/BBB. +167bps and +202bps.


  • Kommuninvest yesterday priced a $1bn 2y deal via Barclays, BNPP, Citi and SEB at swaps +29bps.


  • Swedish Export Credit yesterday priced a $1bn 5y deal via BNMO, BNPP, Citi and Scotia at swaps +53bps.


EUR new issues:

  • Bank of Nova Scotia has priced a €1bn, €STR +30bps, 1y FRN. Self-led.   

  • Eika Boligkreditt yesterday priced €500m of 10y Covered at swaps +35bps through Commerzbank, CA (B&D), Erste, Natixis and Santander.


GBP new issues:

  • Credit Agricole yesterday priced a £400m 8y SNP 6.375% due Jun 2031 to give gilts +218bps. Leads are CA, HSBC, RBC (B&D) and Santander.  


  • Close Brothers yesterday priced a £250m 5y 7.75% due Jun 2028 to give gilts +355bps. Leads are BofA, JPM (B&D) and UBS.  


  • Westpac yesterday priced a £500m 1y FRN due Jun 2024 at SONIA +44bps. Lead is Rabo.


SEK/NOK/DKK new issues:

  • The Asian Development Bank yesterday priced an SEK 1bn, Jun 2028 bond at swaps +11bps via Swedbank.


AUD new issues:

  • KfW last night upsized its existing 4.2% February 8, 2028 Kangaroo bond line by AUD200m to bring the new size to AUD1.1bn. Leads are ML and TD.


CHF new issues:

  • The African Development Bank has priced a CHF 100m 5y bond at around SARON -23bps via Deutsche Bank.