The cross-currency basis markets have continued to exhibit heightened volatility this week, with intraday drops of 2.5bp in EURUSD cross-currency basis and 3.5bps in JPYUSD cross-currency basis on Monday. Despite the global environment showing signs of improvement over the past two days, volatility in these markets remains elevated, with intraday moves now only around 1bp, but still significantly higher than usual.

Issuance in these markets has been put on hold, but is gradually restarting, with deals hitting the market on Wednesday and Thursday in CHF. These deals are coming to shorter tenors than earlier in the year, with 3y and 6y being the most favoured.

Hedge funds are also playing a role in the current state of cross-currency basis markets, as they continue to unwinds structures such as 2y1y and 5y5y. This is contributing to the overall reduction in volatility, as these hedges are no longer needed.

Overall, while the global environment may be improving, cross-currency basis markets remain risky and unpredictable, with heightened volatility being the norm. As such, it’s important for market participants to stay vigilant and adapt their strategies accordingly.