Dollar market goes from strength to strength despite USTs sell-off

The US dollar market proved attractive for Yankee and US banks alike in the opening weeks of the year, with FIG issuance far exceeding supply in euros and funding levels proving more competitive across the capital structure.

On the first trading day of the year (4 January), Toronto-Dominion Bank kicked off senior preferred/OpCo supply and Sumitomo Mitsui Financial Group senior non-preferred/HoldCo with $3bn (€2.46bn) and $2.5bn of issuance, respectively. The Japanese issuer’s TLAC-eligible deal was split into four tranches, including a $500m three year green bond jointly led by Crédit Agricole CIB, and attracted more than $12.1bn of orders, allowing for pricing inside fair value.

AT1 and Tier 2 dollar issuance the next day alone exceeded such supply in euros across the first three weeks of the year, Standard Chartered selling a $1.25bn AT1 on the second trading day of the year (5 January) and National Australia Bank and Crédit Agricole issuing $1.25bn and $1.5bn Tier 2s, respectively.

The French bank’s 20 year bullet 144A/Reg S trade highlighted the savings available versus euros, coming some 20bp-25bp inside where a comparable euro trade might have been priced, after pricing was tightened from IPTs of the 140bp over Treasuries area to 110bp on the back of $4.6bn of orders good at re-offer. While dollar AT1s have previously offered arbitrage versus euros, this has now spread to more senior parts of the capital structure.

“The Yankee bank space has been really active in dollars,” said Fadi Attia, managing director, US dollar FIG, at Crédit Agricole CIB. “That’s a function of significant buyside liquidity and the fact that for much of last year the funding levels in euros for many of the Yankee banks were more competitive than in dollars, whereas this year there’s a material funding cost saving that issuers can extract by taking funding out of dollars and swapping back to euros.

“This has been mainly driven by the strong relative outperformance of US dollar paper relative to euros on the secondary market coupled with the stable cross-currency basis.”

The strong demand was most evident in Standard Chartered’s $1.25bn perpetual non-call 10 issue, which reopened the AT1 market for the year. It attracted some $11.2bn of orders, allowing for pricing to be tightened from the 5.5% area to 4.75%.

“The deal was well received,” said Attia (pictured), “and their ability to extend their non-call curve out to non-call 10 speaks to how robust the market is in that space.”

While international banks approached the dollar market ahead of entering blackouts, US banks hit the market after the reporting season began on 15 January, with Wells Fargo kicking off supply on Tuesday (19 January) with a $3.51bn pref share issue. A book of some $9.2bn allowed pricing to be tightened from the 4.375% area to 3.90% for the perpetual non-call five transaction.

“The Wells Fargo deal is another clear example that speaks to the fact that there’s a wall of cash chasing subordinated product,” said Attia. “You also see that in the Tier 2s, whether it’s the 20 year Tier 2s that CASA and BNP Paribas have done or the NAB with an inverted credit spread curve.”

As the cross-currency basis moves in favour of dollars, the attractions of the market for issuers will continue, particularly in the bank capital segment, according to Attia.

“Demand is holding up in spite of the sell-off in US Treasury rates,” he said. “Whereas investors tend to shy away from adding AT1 during volatility in equities and rates, we haven’t seen any signs of that so far. Real money investors have been either holding on to their positions or been net buyers on any movement wider in AT1. Capital is expected to be refinancing-driven as issuers look to optimize their existing stacks.

“And we haven’t seen a panic sell-off — the migration of rates higher has been orderly, as the Fed is largely expected to step in and help crease any excessive volatility. So the moves over the past couple of weeks have helped support the market compress spreads.”

Overall supply meanwhile remains subdued on an historical basis, in spite of the relatively active start to the year.

“The market is expecting net supply this year to be a lot less than the last several years, including in the financial space,” said Attia. “So it’s certainly an area that continues to benefit from strong technicals.”