Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.

Executive Summary: A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

Executive Summary: A liquidity driven melt-up remains the key driver of bank credit spread performance. As US banks push deposits into money market funds, to manage their Supplemental Leverage Ratio requirements, the short end of the rates market continues to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up is the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last week. In fact, rate curve flattening, and forward breakeven rate declines, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory. While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning.The risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive and moving too early to position for higher or longer than anticipated inflation may be career ending. Ergo, the silent self-doubtful suffering of the rate and credit markets.We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender.

Executive Summary: A liquidity driven melt-up remains the key driver of bank credit spread performance. As US banks push deposits into money market funds, to manage their Supplemental Leverage Ratio requirements, the short end of the rates market continues to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up is the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last week. In fact, rate curve flattening, and forward breakeven rate declines, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory. While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning.The risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive and moving too early to position for higher or longer than anticipated inflation may be career ending. Ergo, the silent self-doubtful suffering of the rate and credit markets.We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender.

Bank Credit Weekly: Liquidity Driven Melt-Up Pulls Spreads Tighter

M&A Reporting, CTFN

Jonathan Spitzer

M&A Reporting

CTFN

Bringing the marketplace leading coverage of mergers, events, and major corporate actions, CTFN has a team of seasoned reporters from Los Angeles to London, publishing news that advances stories that matter to event-driven investors and deal professionals.

Event-Driven

Would BMO, one of Canada's big five banks, consider acquiring the U.S.' CIT Group? An academic tells <a href="http://ctfn.news" target="_blank">CTFN</a> that BMO likely looks at CIT as a “manageable risk,” and a chance to “earn highly respectable profits.”

Would BMO, one of Canada's big five banks, consider acquiring the U.S.' CIT Group? An academic tells CTFN that BMO likely looks at CIT as a “manageable risk,” and a chance to “earn highly respectable profits.”

BMO's Interest in US Assets Could Extend to CIT

United States

CIT Group Inc. operates as a holding company. The Company, through its subsidiaries, provides lending, advisory, commercial banking, vendor finance, and leasing services to small and middle market businesses. CIT Group operates globally.

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Cit Group Inc (CIT US)

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

Short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm...

Hank Calenti, CFA

Bank Credit Weekly: Liquidity Driven Melt-Up Pulls Spreads Tighter

Liquidity remains the key driver of bank credit spread performance. The risk is that the rates market is underpricing the potential for an extended...

Hank Calenti, CFA

BMO's Interest in US Assets Could Extend to CIT

Would BMO, one of Canada's big five banks, consider acquiring the U.S.' CIT Group? An academic tells CTFN that BMO likely looks at CIT as a...

CTFN

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