Basis: Big GBP day after EIB reverses Heathrow trajectory

Big GBP day as EIB reverses Heathrow trajectory

While EUR cross-border issuance remains quite muted in a market wary of recent inflation and central bank-driven volatility, the even more volatile GBP equivalent is positively thriving as investors rush to get some juicy sterling spreads.

The last 24 hours have seen the EIB (with a £1bn 7y), KfW and ADB sell a combined £2.5bn of bonds. In euros, the Heathrow and ANZ NZ euro deals arrived yesterday with Heathrow’s 10y €750m deal leading to a strong bid in cable that saw the 5-10y sector lead a push higher for much of the day. That is before news of the EIB’s 7y GBP offering emerged, squashing that part of the cable curve sharply lower.   

The Heathrow offering had been taxiing around the new issues runway for a week or so before being born aloft yesterday, during which time 7y cable basis had ascended from -21.75bps on Jun 28 to -19.25bps on Monday evening.

That was when a whiff of the ECB deal started to circulate, bringing the 7y spread rapidly down to earth, where it is currently parked at -22bps. That round trip, and the accompanying two-way flows in 7y got the juices flowing in cable after the Independence Day pauses on Monday and Tuesday.

And those juices were enough for KfW, £500m in 7y and ADB, £1bn (versus planned £500m) 2y, to add to the sterling momentum. The deals were accompanied by “a lot of flow” in 2y cable between -15.125bps and -15.5bps throughout today, while 7y traded a number of times this morning and into lunchtime between -21.685bps and -21.75bps.

“It’s been a sweet spot for GBP issuance,” said one basis swapper. “We’ve been here many times before, when the window opens, everyone gets excited, then it slams shut.”

“That will happen again, but the difference is that the spreads (for investors) offered in GBP now mean that while everything is aligned and sterling is working well, the deals are just a little bit bigger than is perhaps usual during these bursts. Investors can’t say for sure what things will look like after the summer break so they’ve decided to jump in a bit more than usual.”  

Elsewhere, CHF issuance -  “Attractive for people looking to avoid extreme volatility,” according to one trader - continues to tick over nicely, while the CAD market popped up with a rare CORRA-linked 3-year offering from Council of Europe.

Officials at Council of Europe and the EIB were unavailable for comment at the time of writing.

Shifting basis focus to liquidity from demand - Barclays

As noted here on Tuesday (see Basis: Front and back-ends pulled higher; Aussie news | Article | Total Derivatives) the front- and back-ends of the EUR/USD and JPY/USD cross-currency basis curves have been pushing higher. In the case of the front-end, this is contrary to what the market had expected in the wake of the US debt ceiling agreement at the start of June when it was assumed that revived UST and T-bill supply would drive widening (more negative moves) of those curves.

That didn’t happen, but strategists at Barclays said today that it will. It writes:

• Short-tenor xccy basis for major currencies are likely to face greater widening pressure from reduced USD liquidity (as the Fed shrinks its balance sheet), while regulatory constraints are driving year-end premium again, leaving USD funding-demand dynamics in the back seat.

   

• Longer-tenor xccy basis remained under some widening pressures in H1, but demand pressure on the USDJPY xccy basis is receding while cross-border issuance continues to drive two-way volatility. Longer-tenor basis are less exposed to widening from liquidity scarcity, which could also be offset by carry-pursuing payer interests and import flows.

Looking at the impact of cross-border issuance on the longer end of the basis curve, Barclays says that, “Cross-border issuance remains a two-way supply-demand factor for longer-tenor basis. In EUR, the slowdown in relative issuance of Yankee bonds (issuance tightens the basis) over Reverse Yankee bonds (issuance widens the basis) compared to 2022 has led to a gradual flattening pressure on the EURUSD basis curve.”

However, “The impact of issuance on xccy basis has been rather neutral more recently. In AUD, issuance of longer-tenor USD-denominated debt by deposit-scarce Australian banks affects the AUDUSD basis as such funds are swapped back to AUD (ie, the pay basis and these flows have recovered after the post-COVID slump). In JPY, outstanding issuance of USD-denominated bonds by Japanese entities has plateaued over the last few years. Hence, debt issuance has had a relatively muted impact on the JPY basis in both directions (USD debt vs Samurai bonds), although we see a risk of increased Samurai issuance going forward.”

Barclays concludes by saying that “longer-tenor basis tend to be less exposed to widening pressure from liquidity scarcity than short-tenor basis, while carry-pursuing payer interests and importer flows can drive some tightening.”

• First, xccy payer trades remain attractive with xccy basis spreads generally hovering at wide levels and with the 1-5y part of the curve offering a particularly attractive carry/roll “up” profile. With wide levels of basis, xccy ASW into non-USD major currencies also continues to offer excess carry over US Treasuries. Such carry trades could continue to provide tightening backstop so long as broad market volatility remains friendly to carry trades.

   

• Second, non-US importers’ dollar FX hedging demand could also exert some tightening pressure. Broad USD strength tends to promote an extension of FX-hedging tenors to fix cheaper forward levels.

Flow

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

New issues

USD new issues:

• SMFG is later today pricing a multi-tranche USD bond consisting of 3y bonds at about USTs +130bps, 5y at 165bps, 7y at +185bps, 10y at +195bps and 20y at +225bps. Via Goldman, Citi, JPM and SMBC.

   

• Toyota Motor Corp is expected to today price a three tranche USD benchmark Sustainability Bond consisting of 3y at USTs +80bps, 5y at +100bps and 10y at +135bps. Via BofA, Citi, JPM and MS.

   

• Shinhan Financial has mandated BNPP, Citi, JPM, Mizuho and Standard Chartered for a series of investor meetings starting Jul 10^th ahead of a 5y 144a/RegS social note offering.

   

• Commonwealth Bank of Australia this morning priced a $100m, SOFR +50bps FRN via HSBC.  

   

• Nomura yesterday priced a $1.5bn 2-part ($900m 5y and $600m 10y). Leads Nomura and BofA. Baa1/BBB+. +183bps and +215bps. 

   

• BFCM yesterday priced a $2.5bn 3-part ($1.4bn 3y, $350m 3y FRN and $750m 5y). Leads Citi, MS, WFS and UBS. Aa3/A+/AA-. +130bps, SOFR +140bps and +155bps.

EUR new issues:

• Heathrow Funding yesterday priced a 10y, €750m, Sustainability Bond at swaps +148bps through Barclays, BNPP, Lloyds, NatWest (B&D) and RBC.
  
  
• ANZ New Zealand yesterday priced a €500m 3y Covered at swaps +33bps through ANZ, Barclays, BNPP and UBS.

GBP new issues:

• KfW has priced a £500m, long 7y Green bond at gilts +39bps via HSBC, MS and TorDom. Books were £750m.

   

• The Asian Development Bank has priced a £1bn (twice the advertised size), 6.125%, Aug 2025 bond at gilts +65bps via Barclays, Nomura and RBC.

   

• The EIB last night priced a £1bn i long 7y bond at gilts +40bps via Barclays, BMO and RBC. Books are in excess of £1.75bn.

CAD new issues:

• Council of Europe Development Bank is close to pricing a 3.5y, CORRA swaps +22bps bond via BMO, CIBC, RBC (B&D) and Scotia.

CHF new issues:

• The Asian Development Bank is close to pricing a CHF 115m, 2033 bond at swaps +27bps via Deutsche.

JPY new issues:

• BPCE sold the following Samurai bonds: JPY19.3bn in 1.364%, July 13, 2029 at 115bps over mid-swaps. Callable once in July 2028 at par, JPY2.4bn, 1.084%, July 12, 2030 at 73bps over mid-swaps, JPY4.6bn in 1.442%, July 12, 2030 bonds with single call at par in July 2029. Priced at 116bps over mid-swaps, JPY44.7bn in 1.163%, July 13, 2027 bonds with single call at par in July 2026. Priced at 105bps over mid-swaps, JPY49.2bn, 0.914%, July 13, 2028 at 70bps over mid-swaps, JPY52.4bn, 0.713%, July 13, 2026 at 60bps over mid-swaps and JPY8.5bn, 1.344%, July 13, 2033 at 80bps over mid-swaps.