Basis: Market freezes before Bailey's banger

Sausage 24 Nov 2020
The MPC, led by Governor Bailey, took the bull by the horns today with a 50bps hike. Basis swappers look at the impact amid a market pause.

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  • Market freezes before Bailey's banger

  • Flow

  • New issues


Market freezes before Bailey's banger

Activity in the cross-currency basis swaps market, especially cable, was on ice going into the big BOE MPC decision today as a run of bearish events, hawkish words from the Fed’s Powell yesterday, an unexpectedly large 50bps hike in Norway and remarks from the Bank of Canada, set a edgy tone ahead of the MPC.


A couple of fleeting months ago this MPC meeting was to be one last 25bps hike before a pause, followed by cuts. Instead, going against market pricing, the MPC upped Bank Rate by the full, 50bps to 5%.


With political and media pressure to do something about inflation having built rapidly in recent days, the risk of Governor Andrew Bailey emerging from his bunker beneath BOE HQ roaring like a ragged polar bear after a tussle with a walrus while waving a 50bps hike in his blood-soaked mitt had basis swappers thinking even before the confirmation of this meaty hike.


If they do hike by 50bps,” said the above swapper, “then I’d expect 10s30s cable to flatten. That’s counter-intuitive because you’d expect GBP FX to rally afterward such a move which would normally steepen cable, but I think any FX bounce would prove very short-lived on concerns that the BOE is hiking the UK into recession.”  


Meanwhile, cable flows today, said the longstanding swapper, are “dead… but in EUR/USD there have been a few bits and pieces.”


He said that while the EUR/USD flows haven’t been especially notable, what does stand out is how low the basis curve is in that market, with the extremely flat curve priced between -28 and -30bps all the way from 9m to 20y.


The trader said that “the curve is too low but it’s a function of the heavy recent issuance in EUR as borrowers try to lock in current rates before they go up again. Heavy issuance is going to keep the EUR/USD curve very low for a while to come.”


Traders could report no cable flow today, not even in the XVA zone of 20-30y (though that may change after the MPC rallied long gilts and flattened the curve). In EUR/USD there has been a fair bit of 5y flow at -28.25bps then especially at -28.125bps. The 7y EUR/USD has been busy either side of -28.75bps and 10y at -29.75bps has traded a couple of times.” In the EUR issuance world though the only obvious basis-swappable deal currently on the table is Nasdaq's €750m long 8y. Along with multi-tranche USD issuance, the funds will be used to buy New York-based software company Adenza Group.   



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


New issues


USD new issues:

  • BMO last night priced a $1bn, 5y bond at USTs +21bps via BMO, HSBC, Lloyds, RBC, Scotia and UBS.


EUR new issues:

  • NASDAQ will price a €750m, long 8y bond at swaps +145bps later today. Via BofA, Citi, Goldman (B&D), JPM, MS, Nordea and SEB.