Yankee drumbeat to persist on supply, XCCY levels

Attractive opportunities for European banks in the US dollar market are expected to persist into the second half of the year, given the anticipated sharp drop-off in overall investment grade supply that is expected to support spreads, although the Federal Reserve could yet spoil the favourable conditions later in the year.

Although Yankee bank issuance in the first half of the year, at $129bn (€109bn), was down on the $149bn of the first half of 2020, arbitrage has continued to remain attractive for European issuers, prompting the likes of ABN Amro, Banco Santander and BNP Paribas to tap the dollar market for senior non-preferred (SNP) and HoldCo debt in recent weeks.

“If you look at the European bank index versus the US bank index over the past one, three or even five years, you’re at the upper end of the range for dollars being more attractive than euros on a spread differential basis,” says Ivan Hrazdira, head of DCM Americas and global USD sponsor at Crédit Agricole CIB (CACIB) in New York.

“New issue concessions continue to hover around zero and are in many cases negative,” he adds, “suggesting that order books are still displaying very strong price tension for issuers.”

Additional Tier 1 and Tier 2 supply has been thin on the ground in the Yankee bank space, but NatWest showed off the opportunities to be had when it priced a $750m (£539m) perpetual non-call 10.5 AT1 at 4.60% on the back of a $6.5bn order book on 23 June. The UK bank’s trade came after UBS had in late May achieved the lowest ever coupon on a dollar AT1 from a European issuer, 3.875% on its $750m (CHF685m) perpetual non-call five.

“There has not been a lot of Tier 2 issuance,” adds Hrazdira, “and to the extent that issuers need to access that part of the structure, they should find favourable funding conditions as well.”

Financial institutions supply in total contributed some 45% to the $860bn of investment grade supply in the dollar market in the first half of the year, in line with past levels. However, while Street forecasts anticipate a drop off in total IG issuance to $450bn-$500bn during the second half of the year, financial institutions issuance is expected to remain more robust, potentially constituting half of remaining supply in 2021.

One ongoing positive factor in this respect is funding agreement-backed issuance (FABN), where supply has almost doubled year-to-date, from 18 deals totalling $11.9bn in H1 2020 to 34 deals for $22.7bn in H1 2021.

“We expect that trend to continue,” says Hrazdira, “and that issuance is enough to move the needle.

“Some of the money centre banks, including JP Morgan and BofA, did some very large trades in the first half of the year,” he adds, “and we expect domestic money centre bank funding activity to remain robust.”

Favourable US dollar credit spreads should continue to spur interest in Yankee bank issuance, he says, with the euro/dollar cross-currency basis swap perhaps once again becoming supportive. The cross-currency basis swap narrowed from minus 13bp at the beginning of the year to as tight as minus 4bp in June, but widened slightly to 6.5bp, around which it is expected to remain for the rest of the year, according to CACIB traders.

However, Hrazdira suggests that the continuing drumbeat of Yankee issuance even as the summer slowdown approaches could be partly prompted by concerns among issuers about the outlook.

“It’s possible they foresee a change in conditions due to the Fed withdrawing liquidity later in the year,” he says.

Inflation concerns that sparked bouts of volatility and higher yields earlier in the year have been deemed transitory by the Fed, which is therefore holding off before taking any steps towards tapering or monetary tightening. Many observers nevertheless believe this is mistaken, and hence expect the Fed to play catch-up later in the year, with potentially disruptive effects on markets.

“Clearly the market is pricing in the withdrawal of this liquidity,” says Hrazdira. “You see it in the flattening of the yield curve and you see it in the decrease of TIPS break-evens. It’s difficult to say right now the extent to which it is priced into credit, but you would normally expect an adverse reaction.

“We won’t have visibility on that until the Fed really comes out and starts to articulate a tightening plan.”