Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

With the ink on the Covid-19 stimulus bill yet to dry, the market has moved onto the next topic, infrastructure spending. This has further interest rate and credit spread implications.If you think one size fits all in credit, then you are sadly mistaken. We recently heard a respected cross-asset analyst state that credit is an interest rate product. WRONG! Credit is a spread product and interest rates can be hedged away, albeit at a cost. However, if you unhedged or are in the total return game, then capital preservation is the name of the game now. High grade credit is now mostly a duration instrument. Given that spreads are so low in high grade, there isn’t enough cushion to absorb a rise in rates. This sector of the credit matrix is essentially a shadow interest rate product and that is not what you want to be exposed to at this point in the business cycle. It is better to be in risk assets that are mainly driven by earnings, the economic outlook or those that reset with rates as opposed to those hindered by the interest rate outlook.That said, you can protect your downside moving to shorter duration, higher spreads, or a combination of the two in floating rate product, such as leveraged loans. Concurrently, while the ECB is essentially funding European banks at lower than market rates, the supply of short-dated floating rate bank debt is likely lower than usual. The ECB’s positioning should create a premium for this paper as the year progresses.Market Outlook: We see risk-on in high yield financials and more subordinated credit product as a play on economic recovery as well as a grab for shorter duration in higher rated financials as rising rates aggravate total return mandates. We do not expect the Fed to blink and ride to the rescue from rapidly rising rates, yet. Eventually it will capitulate to the market, but this may be some time off. Financial conditions remain extremely accommodative, and we have a long way back to reach full employment. Bouts of volatility should create buying opportunities.

With the ink on the Covid-19 stimulus bill yet to dry, the market has moved onto the next topic, infrastructure spending. This has further interest rate and credit spread implications.If you think one size fits all in credit, then you are sadly mistaken. We recently heard a respected cross-asset analyst state that credit is an interest rate product. WRONG! Credit is a spread product and interest rates can be hedged away, albeit at a cost. However, if you unhedged or are in the total return game, then capital preservation is the name of the game now. High grade credit is now mostly a duration instrument. Given that spreads are so low in high grade, there isn’t enough cushion to absorb a rise in rates. This sector of the credit matrix is essentially a shadow interest rate product and that is not what you want to be exposed to at this point in the business cycle. It is better to be in risk assets that are mainly driven by earnings, the economic outlook or those that reset with rates as opposed to those hindered by the interest rate outlook.That said, you can protect your downside moving to shorter duration, higher spreads, or a combination of the two in floating rate product, such as leveraged loans. Concurrently, while the ECB is essentially funding European banks at lower than market rates, the supply of short-dated floating rate bank debt is likely lower than usual. The ECB’s positioning should create a premium for this paper as the year progresses.Market Outlook: We see risk-on in high yield financials and more subordinated credit product as a play on economic recovery as well as a grab for shorter duration in higher rated financials as rising rates aggravate total return mandates. We do not expect the Fed to blink and ride to the rescue from rapidly rising rates, yet. Eventually it will capitulate to the market, but this may be some time off. Financial conditions remain extremely accommodative, and we have a long way back to reach full employment. Bouts of volatility should create buying opportunities.

Bank Macro Manifest: Rates to Remain Risk Asset Challenging; Take Carry Opportunities

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

Equities saw a volatile day on Friday but ended higher with the S&amp;P up ~2% and Nasdaq up 1.6%. US 10Y Treasury yields shot up to 1.62%, breaching last week’s high after non-farm payrolls came at 379k for February, almost double the forecasts. The 10Y yield later eased slightly to close at ~1.57%. On Saturday, the US Senate passed  the $1.9tn Covid relief bill with a 50-49 vote. Meanwhile, oil prices jumped over $70/bbl after Saudi said its energy facilities had faced drone attacks  on Sunday. European equities were lower with FTSE down 0.3%, CAC and DAX down 0.8% and 1% respectively. US IG CDS spreads were 2.9bp tighter and HY was 11.3bp tighter. EU main CDS spreads were 1.8bp wider and crossover spreads widened 6.8bp. China’s exports surged  during January and February, up 60.6% YoY with Bloomberg noting increased demand for medical equipment and WFH devices and from trading partners like US and EU. Asian equity markets have opened mixed and Asia ex-Japan CDS spreads were up by 1.6bp.

Astrea VI, IRFC Launch New Bonds; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers &...

Stronger than expected US employment data combined with uncertainty surrounding the Fed’s next steps to drive broader credit markets wider by weekend, although financials remained better bid. Taperless tantrums may be repeated over the near term but financials may be less impacted.While US CCC-rated bonds and Asia High Yield sold-off, almost all European contingent capital and Asia High Yield bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Investors grabbed longer duration Additional Tier 1 (AT1) bonds as the week progressed, on economic strength expectations, while lower duration Senior Unsecured bonds outperformed on rising interest rate expectations. Friday’s non-farm report generated concerns on European growth in a rising rate environment. Queue central bank assurances that they will respond to rising rates over the next few weeks.Despite higher spreads available in more moderate duration AT1 notes, Europe's outperformers were almost exclusively long duration bonds. This outperformance is a very bullish signal. However, we are not convinced that this should apply to each of these institutions.  Please see <a href="https://www.smartkarma.com/insights/credit-suisse-greensill-sows-reputation-risks-underweight-cs-bonds" target="_blank" data-smartkarma-citation="insights:48839" rel="noopener">Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds</a> for further details.Financials remain the sweet spot in Asia credit. Levered to the economy and rising rates, this is the place to be at this point in the market cycle.  Performance attributes varied amongst the various bank credit classes in Asia. Risk-on sentiment drove higher risk AT1 and less subordinated Tier 2 bonds tighter. Meanwhile duration concerns drove investors to target higher spreads per unit of duration in BBB-rated and High Yield Senior Unsecured notes. Taken together, this performance outcome is likely evidence of the melt-up in spreads that we anticipated several weeks ago. Please see <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" data-smartkarma-citation="insights:48133" rel="noopener">Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position</a> for more details.Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.Market Outlook: The Fed will likely Twist before it Tapers, but the timing of both remain uncertain as real long term interest rates remain negative. In the interim, global treasury markets may remain unsettled. 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 IEM) friendly; however, a strong US economic rebound should benefit EM and European financials. Short duration in investment grade financials combined with high credit spreads in High Yield financials and more subordinated debt may remain the way forward.

Stronger than expected US employment data combined with uncertainty surrounding the Fed’s next steps to drive broader credit markets wider by weekend, although financials remained better bid. Taperless tantrums may be repeated over the near term but financials may be less impacted.While US CCC-rated bonds and Asia High Yield sold-off, almost all European contingent capital and Asia High Yield bonds tightened in credit spread terms as investors remained anchored to banks as an economic recovery play. Investors grabbed longer duration Additional Tier 1 (AT1) bonds as the week progressed, on economic strength expectations, while lower duration Senior Unsecured bonds outperformed on rising interest rate expectations. Friday’s non-farm report generated concerns on European growth in a rising rate environment. Queue central bank assurances that they will respond to rising rates over the next few weeks.Despite higher spreads available in more moderate duration AT1 notes, Europe's outperformers were almost exclusively long duration bonds. This outperformance is a very bullish signal. However, we are not convinced that this should apply to each of these institutions.  Please see Credit Suisse: Greensill Sows Reputation Risks, Underweight CS Bonds for further details.Financials remain the sweet spot in Asia credit. Levered to the economy and rising rates, this is the place to be at this point in the market cycle.  Performance attributes varied amongst the various bank credit classes in Asia. Risk-on sentiment drove higher risk AT1 and less subordinated Tier 2 bonds tighter. Meanwhile duration concerns drove investors to target higher spreads per unit of duration in BBB-rated and High Yield Senior Unsecured notes. Taken together, this performance outcome is likely evidence of the melt-up in spreads that we anticipated several weeks ago. Please see Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position for more details.Admittedly, however, we are surprised by the credit strength of Asia-headquartered financials during the global rates rout. We attribute this to two items. First, China is further along the Covid-19 curve in recovery and will clearly benefit as the rest of the world catches-up. Second, financials are a leverage play on the global recovery. Taken together, Asia financials overall are well placed to continue outperforming other markets over the near term.Market Outlook: The Fed will likely Twist before it Tapers, but the timing of both remain uncertain as real long term interest rates remain negative. In the interim, global treasury markets may remain unsettled. 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 IEM) friendly; however, a strong US economic rebound should benefit EM and European financials. Short duration in investment grade financials combined with high credit spreads in High Yield financials and more subordinated debt may remain the way forward.

Bank Credit Weekly: One Size Does Not Fit All

Equities continued to sell-off with S&amp;P down 1.3% and Nasdaq down 2.1%, bringing the tech heavy index to negative territory YTD. US 10Y Treasury yields jumped another 9bp to 1.58%. While Fed Chair Powell maintained his stance on bond buying, he mentioned that ‘disorderly’ market conditions would concern him and added that he did not consider the recent spike in yields as disorderly. Newswires report that market participants were disappointed that he did not mention specifics on what the Fed would do to slow down long-term rates if desired. European equities held up better, flat to slightly lower. US IG CDS spreads were 1.9bp wider and HY was 9.5bp wider. EU main CDS spreads were flat and crossover spreads widened 0.1bp. Asian equity markets are down over 0.5% and Asia ex-Japan CDS spreads are wider by 0.8bp.

Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

After a respite on Monday, US equities closed in the red on Tuesday with the S&amp;P down 0.8% and Nasdaq down 1.7%. US 10Y Treasury yields eased 3bp with the risk-off tone. While Wall Street moved lower, Europe’s FTSE, DAX and CAC 40 rose 0.4%, 0.2% and 0.3%. After CDS spreads saw a sharp contraction on Monday, the moves were muted yesterday. US IG CDS spreads were 0.7bp wider and HY was a 4.3bp wider. EU main CDS spreads tightened 0.1bp and crossover spreads widened 1.3bp. China’s Caixin Services PMI came at 51.5 for February, slightly lower than the January’s print of 52. Asian equity markets are up 0.5% and Asia ex-Japan CDS spreads are tighter by 0.1bp.

HCL Launches $ Bond; Macro; Rating Changes; New Bond Issues; Talking Heads; Top Gainers & Losers

Singapore

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 Macro Manifest: Rates to Remain Risk Asset Challenging; Take Carry Opportunities

Onto the next market hurdle, infrastructure spending. Take lower rated, subordinated debt to play the economic recovery and high spread per unit of...

Hank Calenti, CFA

Astrea VI, IRFC Launch New Bonds; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers &...

Equities saw a volatile day on Friday but ended higher with the S&P up ~2% and Nasdaq up 1.6%. US 10Y Treasury yields shot up to 1.62%,...

BondEvalue

Bank Credit Weekly: One Size Does Not Fit All

Performance attributes varied amongst bank credit classes. Short duration in IG financials combined with high credit spreads in HY and more...

Hank Calenti, CFA

Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

Equities continued to sell-off with S&P down 1.3% and Nasdaq down 2.1%, bringing the tech heavy index to negative territory YTD. US 10Y...

BondEvalue

HCL Launches $ Bond; Macro; Rating Changes; New Bond Issues; Talking Heads; Top Gainers & Losers

After a respite on Monday, US equities closed in the red on Tuesday with the S&P down 0.8% and Nasdaq down 1.7%. US 10Y Treasury yields eased...

BondEvalue

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