Halister News

(Bloomberg) -- An expected pickup in issuance of callable dollar debt, including Formosa bonds, in the coming weeks may tighten long-end USD swap spreads and pressure implied long-tenor rates vols lower, analysts say.

• National Bank of Abu Dhabi raised $885m toward the end of last week in 30-year callable bonds listed in Taiwan
  • 30-year USD swap spreads quickly narrowed by about 1.5bps as the swap curve flattened once the market opened following the deal in London; Tokyo markets closed today for holiday
• Expect valuations at the bottom right of the USD rates-vol grid to be driven by vega supply as we head into what’s typically the busiest few weeks of callable supply for the year, JPMorgan strategists wrote in a note dated Jan. 7
  • “While January should once again represent the heaviest month of the year, a somewhat earlier than usual Chinese New Year should push some of that issuance back a few weeks”
• Citigroup says in note that January normally sees an issuance surge in long-dated callables, including Formosa; dealers normally hedge associated swaps by receiving in 30y, which has a direct negative impact on 30y spreads
  • Gross issuance of long-dated callables this January should be smaller than last year because most of the bonds eligible for redemption are unlikely to be called after the recent market selloff: Citi
• BofAML sees the potential for still-elevated Formosa supply in 2017, which they expect to pressure implied vols lower especially in expiries of more than 6 years on long tails
• NOTE: Formosa bonds are foreign-currency securities sold in Taiwan, targeting Asian investors looking to enhance yields; issuance of Formosa and other dollar debt with call options creates volatility supply to the market