Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Slower near-term growth may be risk asset positive. A slower growth trajectory may engender reduced inflation expectations which could translate into lower Treasury yields and a lower dollar value. This could produce a longer, more sustainable, recovery rather than the current soufflé economy track. That would be Emerging Market positive. Germany announced, then retracted, plans to institute a tougher lock-down over the Easter weekend. This raised fears that a third wave of Coronavirus cases could impact demand globally. This may have contributed to a flight to safety and increased bearish pressure across risk assets as investors re-assessed near term GDP expectations.Risk assets have been discounting an inflationary surge in growth ahead. However, as US Covid-19 cases rise and European vaccination programs lag, prospects for US Q1 and Q2 GDP are deteriorating by the day. Ironically, various supply-chain disruptions, which could negatively impact production in coming month, may slow growth more than it boosts inflation. This could also be Emerging Market positive.US Treasuries continued their sawtooth upwards pattern of declining then rising. Transitory and more permanent factors impacted US Treasury and risk-asset returns this week. Notably, real rates remained steady.Transitory effects included supply plus month-end and quarter-end rebalancing which put pressure on yields. More permanent factors likely included less draconian SLR exemption interpretations and possibly the economic demand impact of vaccine distribution difficulties as Covid-19 infections rise. Amongst Asia EM banks, India bank equity continued its underperformance while Thai banks remained relatively unchanged following notable banking-related announcements in each country.The decline in India’s bank shares exceeded others in Asia. The interest-on-interest accrual decision, and the valuation of Additional Tier 1 bond guidance by the Supreme Court and the Securities &amp; Exchange Board of India (SEBI), respectively, are particularly onerous and damaging to bank valuations.In Asia, short duration bank bonds outperformed although most bank notes generated total positive returns on Treasury price strength.  Liquidity in Turkish bank bonds dried-up as the fall-out from the unexpected firing of the Central Bank Governor last week.Market Outlook: The question for next week is how much portfolio re-balancing out of stocks and into bonds has already occurred. This normally would take place during the last week of the quarter. However, with month-end just before Easter market holidays, trading conditions may be relatively thin next week. As such, portfolio adjustments may have been pulled forward. From a risk asset perspective, it may be wise to jump back into the market before the quarter-end to get ahead of the pack. From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat.

Slower near-term growth may be risk asset positive. A slower growth trajectory may engender reduced inflation expectations which could translate into lower Treasury yields and a lower dollar value. This could produce a longer, more sustainable, recovery rather than the current soufflé economy track. That would be Emerging Market positive. Germany announced, then retracted, plans to institute a tougher lock-down over the Easter weekend. This raised fears that a third wave of Coronavirus cases could impact demand globally. This may have contributed to a flight to safety and increased bearish pressure across risk assets as investors re-assessed near term GDP expectations.Risk assets have been discounting an inflationary surge in growth ahead. However, as US Covid-19 cases rise and European vaccination programs lag, prospects for US Q1 and Q2 GDP are deteriorating by the day. Ironically, various supply-chain disruptions, which could negatively impact production in coming month, may slow growth more than it boosts inflation. This could also be Emerging Market positive.US Treasuries continued their sawtooth upwards pattern of declining then rising. Transitory and more permanent factors impacted US Treasury and risk-asset returns this week. Notably, real rates remained steady.Transitory effects included supply plus month-end and quarter-end rebalancing which put pressure on yields. More permanent factors likely included less draconian SLR exemption interpretations and possibly the economic demand impact of vaccine distribution difficulties as Covid-19 infections rise. Amongst Asia EM banks, India bank equity continued its underperformance while Thai banks remained relatively unchanged following notable banking-related announcements in each country.The decline in India’s bank shares exceeded others in Asia. The interest-on-interest accrual decision, and the valuation of Additional Tier 1 bond guidance by the Supreme Court and the Securities &amp; Exchange Board of India (SEBI), respectively, are particularly onerous and damaging to bank valuations.In Asia, short duration bank bonds outperformed although most bank notes generated total positive returns on Treasury price strength.  Liquidity in Turkish bank bonds dried-up as the fall-out from the unexpected firing of the Central Bank Governor last week.Market Outlook: The question for next week is how much portfolio re-balancing out of stocks and into bonds has already occurred. This normally would take place during the last week of the quarter. However, with month-end just before Easter market holidays, trading conditions may be relatively thin next week. As such, portfolio adjustments may have been pulled forward. From a risk asset perspective, it may be wise to jump back into the market before the quarter-end to get ahead of the pack. From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat.

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

Bond market data and technology, BondEvalue

BondEvalue

Bond market data and technology

BondEvalue is a Singapore-based Fintech that specializes in bond market data and technology. The company's information services business offers bond market data on hard-currency corporate & sovereign bonds across Asia, Middle East, Europe and the Americas. The data, which includes bond prices, yields, news and analytics, is offered to end investors via interactive Mobile and Web Apps. Investors can sign up for a free trial of the service either via the company's website (https://bondevalue.com) or by downloading the BondEvalue Mobile App (http://onelink.to/wej7jq). BondEvalue is also developing an electronic bond exchange, BondbloX in Singapore that allows investors to trade bonds electronically in smaller sizes (US$1,000 or equivalent). For more information, visit https://www.bondblox.com/

Bond Market Data and Technology

S&amp;P ended 0.8% lower and Nasdaq was 1.1% lower, reversing Monday’s gains. The US 10Y Treasury yield dipped 7bp to 1.60%. US Treasury Secy. Janet Yellen said that there were no current plans to lengthen the maturity of debt issuance. European equities also struggled with the DAX flat while FTSE and CAC were down 0.4% each. US IG CDS spreads were 0.5bp wider and HY was 6.8bp wider. EU main CDS spreads were 0.6bp tighter and crossover spreads tightened 0.3b. Asian equity markets have opened lower by 0.6% and Asia ex-Japan CDS spreads are tighter 1.7bp.

AVIC, Goho Launch $ Bonds; Macro; Rating Changes; New Bond Issuances; Talking Heads; Top Gainers ...

S&amp;P ended flat on Friday while Nasdaq was 0.8% higher. The US 10Y Treasury yield was 2bp lower. Financials underperformed the index as the Fed confirmed it would not extend the Supplementary Leverage Ratio (Term of the Day, explained below) beyond the March 31, 2021 deadline set last year. Meanwhile, European equities fell with the DAX down 1%, CAC and FTSE down ~1.1%. US IG CDS spreads were 0.4bp tighter and HY was 4.3bp tighter. EU main CDS spreads were 0.2bp tighter and crossover spreads widened 1.2bp. Asian equity markets have opened slightly higher, up 0.3% and Asia ex-Japan CDS spreads are tighter 0.1bp.

Naver & JunFa Launch $ Bonds; Macro; Rating Changes; New Bond Issuances; Talking Heads; Top Gaine...

It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. Market Outlook: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.

It is difficult to make a truly bullish argument on behalf of US Treasuries now. The bottom line is it is still not time to buy duration. Risk yes. Duration no. Emerging Markets? It depends.The Fed re-anchored short-term, front-end, interest rate expectations via the Dot Plot, the Chairman’s comments, and actions to aid the overnight rate market. Overall, it was a better-than-expected communique from the Fed. With a spike of inflation next on the horizon, it may be a hard act to follow.Inflation can hide a host of sins. It can benefit financials and borrowers, but not the vulnerable in society, as inflation is a regressive tax. From a financial market perspective, it is difficult to envision a near-term spike in inflation as being credit positive. Market interest rates may overshoot as insurance against out-of-control inflation expectations. Risk assets, in particular Emerging Market assets, could over-react while the Fed under-reacts.The risk is that US policy makers are “fighting the last war.” Rather than continued curve steepening, we may see a period of consolidation, as short-end interest rate expectations rise at a faster rate,  essentially flattening the yield curve. We expect the Fed to be on watch for this.For financials, we anticipate improved net interest income levels during Q2 as both volume and yields rise. This would also result in higher non-interest income revenues as fee income soars from increased transactions. However, trading activity may see some institutions off-sides in terms of mistiming the market. We believe that it is better to be in banks with solid core operating revenues, rather than firms that have rediscovered and become over-reliant, once again, on trading activity.The recent back-up in US interest rates may be an opportunity to reload in some Emerging Markets (EM), just not in Turkey. Central bank independence is shattered once again by the firing of the Central Bank Governor. Only four months into the role, the former Governor is being replaced by an interest rate dove. We expect a large correction in Turkish bank bond as the markets digest this implausible reality next week. It may be better to focus on opportunities off the radar. EM high yield, but low duration, sovereign and more frontier bonds may be the answer. We cite a few inside.In terms of recent performance, in Asia, short duration and long risk bank bonds kept pace with Treasury weakness to end the week unchanged on a total return basis. Meanwhile, longer-dated European bank Contingent Capital (CoCos) managed to keep pace with Treasury market weakness to end the week unchanged on a total return basis. Each Additional Tier 1 bond callable in 2030 and 2031 tightened by 10 basis points. Given the simultaneous tightening, we ascribe this performance as due a restart of the AstraZeneca shot across the lagging EU’s vaccine effort. A third round of lockdowns may unwind these gains next week. Market Outlook: The US economy may run very hot before we see a change in Fed policy regarding short-term interest rates and the US dollar should remain stronger than analysts forecasted at year-end. Broadly, this is not Emerging Market friendly; however, a strong US economic rebound should benefit EM and European financials. First, we may need to get past the upcoming inflation spike.

Bank Credit Weekly: Inflation, the Next Market Challenge or Opportunity?

US equities fell yesterday with the S&amp;P down 1.5% while the tech heavy Nasdaq slipped over 3%. Apple, Amazon and Netflix fell over 3.4%. The only sector in the green was financials, up 0.6%. The fall in equities came after the 10Y Treasury yield shot to 1.75% and then pulled back to 1.70%. US Philly Fed Manufacturing Index printed at a massive 51.8 vs. a forecast of 23, its highest level in almost 48 years while US jobless claims for the prior week was up 45k to 770k vs. the 700k forecast. European equities ended higher with the DAX up 1.2% while the FTSE and CAC were up 0.3% and 0.1%. US IG CDS spreads were 1.6bp wider and HY was 12bp wider. EU main CDS spreads were 0.5bp tighter and crossover spreads tightened 1.6bp. Asian equity markets have opened lower ~1% and Asia ex-Japan CDS spreads are tighter 1bp.

Macro; Rating Changes; New Bonds Commentary; Talking Heads; Top Gainers & Losers

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iShares Barclays USD Asia High Yield Bond Index ETF is an exchange-traded fund incorporated in Singapore. The Fund seeks to track the performance of the Bloomberg Barclays Capital USD Asia High Yield Bond Index.

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Asia High Yield Bond Index (AHYG SP)

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

A slower growth trajectory may reduce inflation expectations which could translate into lower yields and $ value. This could produce a longer...

Hank Calenti, CFA

AVIC, Goho Launch $ Bonds; Macro; Rating Changes; New Bond Issuances; Talking Heads; Top Gainers ...

S&P ended 0.8% lower and Nasdaq was 1.1% lower, reversing Monday’s gains. The US 10Y Treasury yield dipped 7bp to 1.60%. US Treasury Secy....

BondEvalue

Naver & JunFa Launch $ Bonds; Macro; Rating Changes; New Bond Issuances; Talking Heads; Top Gaine...

S&P ended flat on Friday while Nasdaq was 0.8% higher. The US 10Y Treasury yield was 2bp lower. Financials underperformed the index as the Fed...

BondEvalue

Bank Credit Weekly: Inflation, the Next Market Challenge or Opportunity?

The recent back-up in US rates may be an opportunity to reload in some Emerging Markets. A US inflation spike is the next hurdle. EM High Yield,...

Hank Calenti, CFA

Macro; Rating Changes; New Bonds Commentary; Talking Heads; Top Gainers & Losers

US equities fell yesterday with the S&P down 1.5% while the tech heavy Nasdaq slipped over 3%. Apple, Amazon and Netflix fell over 3.4%. The...

BondEvalue

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52-week Range

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