Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Goldilocks may morph into a market wolf if the US Senate changes leadership while 100 mask wearing days haunts of Jimmy Carter-like sentiment. This is not priced in and these changes may limit the annual January bounce.Also, there is a risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. US bank earnings announcements at mid-month will be watched for signs of management concern as well as dividend expectations. January’s top 10 performers could have distinctively lower risk profiles.Idiosyncratic plus vaccine impact expectations drove December performance. As such, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (23 HK)</a> and Thai Bank Additional Tier 1 (AT1) securities outperformed in Asia, albeit for differing reasons.While Thai bank bonds rode the wave of enthusiasm following announcements of Coronavirus vaccines, Bank of East Asia’s notes gained on credit technical reasons. Similarly, <a href="https://www.smartkarma.com/entities/vietnam-prosperity-jsc-bank" target="_blank" data-smartkarma-citation="entities:26914:1" rel="noopener">Vietnam Prosperity's (VPB VN)</a> bond rose on vaccine developments while Ardshindbank and <a href="https://www.smartkarma.com/entities/china-minsheng-banking-a" target="_blank" data-smartkarma-citation="entities:655:1" rel="noopener">China Minsheng  (600016 CH)</a> gained as their respective credit situations improved.Bank of East Asia’s decision to retire its December callable Additional Tier 1 bonds woke the market to our insight several months earlier that this debt is inefficient capital. Please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-buy-the-inefficient-capital-securities" target="_blank" data-smartkarma-citation="insights:42753" rel="noopener">Buy the Inefficient Capital Securities</a> and <a href="https://www.smartkarma.com/insights/bank-of-east-asia-move-to-overweight-the-capital-inefficient-securities-from-buy" target="_blank" data-smartkarma-citation="insights:45652" rel="noopener">Move to Overweight the Capital Inefficient Securities from Buy</a> for more details.<a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">YES Bank (YES IN)</a> led spread widening. Having hit par at one point during December, investors followed our recommendation to lighten exposure. Please see: <a href="https://www.smartkarma.com/insights/yes-bank-par-is-plenty-move-to-underweight" target="_blank" data-smartkarma-citation="insights:46120" rel="noopener">Par Is Plenty- Move to Underweight</a> for more details.In a positive sign from a vaccine momentum perspective, the positive spread movement amongst Thailand’s AT1 bonds continued throughout December. Nonetheless, we see this as a cognitive dissonance trade which ignores vaccine distribution and time extension risks. Rolling lockdowns do not improve consumer confidence and lower Q1 economic output in Europe and the US may ensue. This could impact Asia asset values and our preference would be to fade the rally in Thai bank AT1.

Goldilocks may morph into a market wolf if the US Senate changes leadership while 100 mask wearing days haunts of Jimmy Carter-like sentiment. This is not priced in and these changes may limit the annual January bounce.Also, there is a risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. US bank earnings announcements at mid-month will be watched for signs of management concern as well as dividend expectations. January’s top 10 performers could have distinctively lower risk profiles.Idiosyncratic plus vaccine impact expectations drove December performance. As such, Bank of East Asia (23 HK) and Thai Bank Additional Tier 1 (AT1) securities outperformed in Asia, albeit for differing reasons.While Thai bank bonds rode the wave of enthusiasm following announcements of Coronavirus vaccines, Bank of East Asia’s notes gained on credit technical reasons. Similarly, Vietnam Prosperity's (VPB VN) bond rose on vaccine developments while Ardshindbank and China Minsheng  (600016 CH) gained as their respective credit situations improved.Bank of East Asia’s decision to retire its December callable Additional Tier 1 bonds woke the market to our insight several months earlier that this debt is inefficient capital. Please see Buy the Inefficient Capital Securities and Move to Overweight the Capital Inefficient Securities from Buy for more details.YES Bank (YES IN) led spread widening. Having hit par at one point during December, investors followed our recommendation to lighten exposure. Please see: Par Is Plenty- Move to Underweight for more details.In a positive sign from a vaccine momentum perspective, the positive spread movement amongst Thailand’s AT1 bonds continued throughout December. Nonetheless, we see this as a cognitive dissonance trade which ignores vaccine distribution and time extension risks. Rolling lockdowns do not improve consumer confidence and lower Q1 economic output in Europe and the US may ensue. This could impact Asia asset values and our preference would be to fade the rally in Thai bank AT1.

Bank Credit Compass: Regime Change May Limit the Annual January Bounce

The rally in Asia’s financial institutions is beginning to look a bit long in the tooth. At aggregate index levels, Asia-headquartered financial yields are lower than beginning of the year levels, irrespective of the index considered.To the untrained eye, this would suggest that the party is over, however, this ignores the alternate investment opportunity as well as ongoing market technical dynamics which could keep things afloat for longer than anticipated.Crowding-in affects by central banks as well as the continuing unwinding of assets placed in safe havens, such as US$ Money Market Fund assets, could result in indiscriminate buying of Asia-headquartered financials by non-Asian investors.Excluding this hunt for yield across the global, fundamentally more, albeit limited, upside remains available from investing in securities issued by Asia-headquartered financial institutions. However, a January bounce is not out of the question. Financial assets could overshoot fundamental valuations over the near term. As such, given where we start from, absent another market shock, Asia’s bank credit indexes and securities may offer positive total returns during the first quarter of 2021, albeit at relatively lower levels than seen in the second half of 2020.

The rally in Asia’s financial institutions is beginning to look a bit long in the tooth. At aggregate index levels, Asia-headquartered financial yields are lower than beginning of the year levels, irrespective of the index considered.To the untrained eye, this would suggest that the party is over, however, this ignores the alternate investment opportunity as well as ongoing market technical dynamics which could keep things afloat for longer than anticipated.Crowding-in affects by central banks as well as the continuing unwinding of assets placed in safe havens, such as US$ Money Market Fund assets, could result in indiscriminate buying of Asia-headquartered financials by non-Asian investors.Excluding this hunt for yield across the global, fundamentally more, albeit limited, upside remains available from investing in securities issued by Asia-headquartered financial institutions. However, a January bounce is not out of the question. Financial assets could overshoot fundamental valuations over the near term. As such, given where we start from, absent another market shock, Asia’s bank credit indexes and securities may offer positive total returns during the first quarter of 2021, albeit at relatively lower levels than seen in the second half of 2020. 

Bank Credit Strategy: Q1 Glass Half Full as Market Dynamics Overwhelm Relative Valuations

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFL IN)</a> 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's  (23 HK)</a> 2024 callable AT1 outperformed while <a href="https://www.smartkarma.com/entities/siam-commercial-bank-pub-co" target="_blank" data-smartkarma-citation="entities:214:1" rel="noopener">Siam Commercial Bank's (SCB TB)</a> 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: <a href="https://www.smartkarma.com/insights/bank-credit-weekly-fed-spikes-while-the-ecb-sweetens-the-punch-bowl" target="_blank" data-smartkarma-citation="insights:46524" rel="noopener">Fed Spikes While the ECB Sweetens the Punch Bowl</a>.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Asia’s Additional Tier 1 (AT1), Subordinated and high yield Senior Unsecured bonds outperformed higher rated Senior Unsecured notes over the holiday shortened week. Hong Kong-based AT1 issuers led for a second week in a row. Nonetheless, Indiabulls Housing Finance's (IHFL IN) 6 3/8% coupon 2022 maturity note led overall performance by tightening 56 basis points. This bond continues to trade almost 1300bps over its benchmark bond and is relatively illiquid. Amongst more liquid notes, Bank of East Asia's  (23 HK) 2024 callable AT1 outperformed while Siam Commercial Bank's (SCB TB) 2023 Senior Unsecured bond underperformed. Thailand-based bank issuers dragged high grade Senior Unsecured returns lower.Thin markets were directionless over the last week, so we focus on bond performance in this note. For our views on likely Brexit, stimulus, and virus impacts, please see last week’s Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl.Market Outlook: Brexit and eventual US stimulus is largely priced into US Treasury and credit markets. Reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. As such, thin markets may exacerbate price moves over the next two weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.Market Outlook: Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

There is a healthy concern that the Fed is spiking this holiday season’s punch bowl while the ECB is sweetening the brew with additional TLTROs and less collateral. US federal stimulus may add the moonshine. These actions will impact Asia’s risk assets. Thin markets could see outsized moves as year-end event deadlines approach. Risk remains to the downside as positive outcomes are already priced in. Nonetheless, the Fed continues to underwrite this market although the longevity is open to debate despite recent announcements. Credit investors cannot fight the Fed, but you can fight the urge to overindulge.Two days after the Fed announcement to extend the longevity, but not alter the duration, of its bond purchases, FOMC members openly began to qualify this decision. The announcement is tantamount to spiking the punch bowl. Price discovery is already distorted in the credit markets and excessive risk taking is already encouraged. With economic recovery priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction. This risk remains some time off, but it may approach at some point in 2021 and begin to get priced in much earlier.The failure of the Fed to alter the duration of its bond purchases should embolden the market to break the psychological 1% barrier on the 10-year Treasury bond, especially if we see a US federal stimulus package over the weekend. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. Concurrently, higher rates would raise the real effective rate and could be dollar negative. Asia and EM securities could follow, then retrace positive moves.Work through the weekend to agree additional US federal stimulus may bear fruit as a compromise on ending the Fed’s emergency lending programs is reached. A limited agreement is priced-in, but downside may also be limited as the early January Senate run-off race in Georgia will become the focus irrespective of the current stimulus bill. The run-off race outcome could deliver even more stimulus shorter thereafter.In Europe, fishing rights are damming the works towards a Brexit deal. This disagreement could be bridged. Meanwhile, Christmas is effectively cancelled in London due to the virus while other US and European jurisdictions continue to see increased economic impacts. Rolling lockdowns do not improve consumer confidence and Q1 2021 economic contractions may ensue. This could impact Asia asset values.In Asia itself, China-centric risk assets continue to perform, although these still have a long way to catchup with the recent US rally. Positive sentiment that China’s economy will continue to outperform are tempered with caution regarding the potential for increased defaults. Vaccine expectations continue to power other markets in Asia in a cognitive dissonance trade which ignores vaccine distribution and time extension risks.Market Outlook: Positive stimulus or Brexit news could lead to a strong start in Asia as the week begins. However, a buy the rumor, sell the fact tactical trade could then ensue. Thin markets may exacerbate price moves over the next two to three weeks. This may confuse noise for signals. We think it better to fade a further market rally. At the same time, we would avoid extending into any year-end decline.

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

Three macro events this week should drive near term returns. The outcomes may appear fiendish to over-extended investors, much in the same way that Krampus, the mythical counterparty to St. Nicholas, taunts naughty children.The events include the outcome of the Fed’s Federal Open Market Committee meeting, the final week for the US Congress to agree addition US federal stimulus bill this year and the almost final week towards a Brexit deal. Resulting US dollar strength could snuff out the recent rally in Asia and broader EM US$-denominated credit.Expectations that the Fed could alter its bond purchase program at its upcoming meeting has limited bearish sentiment in the long end of the Treasury market. Look for a decision to extend the weighted average maturity of its bond purchases. The failure of the Fed to deliver could embolden the market to break a psychological 1% barrier on the 10-year Treasury bond. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. However, this would raise the real effective rate and could be dollar negative. Asia and EM securities could react.Even if the Fed delivers what one-half of the market expects by altering its bond buying program, there are other extenuating circumstances that could result in a flight to quality, such as renewed lockdowns, the lack of a federal fiscal package and / or Brexit agreement. In a reversal of the recent trend of bad news = buy, the lack of federal stimulus would lower risk sentiment. We remain unconvinced that an actual agreement is the underlying goal of these negotiations. Control of the US Senate is at stake and the political posturing plays right into that race. Failure to reach an agreement would move all eyes to the Senate run-off races in January. Please see out last weekly, <a href="https://www.smartkarma.com/insights/bank-credit-weekly-new-equation-is-bad-news-buy" target="_blank" data-smartkarma-citation="insights:46058" rel="noopener">The New Equation is Bad News = Buy</a>, for more details. The continuing saga of Brexit negotiations may also change investor risk preferences. As we approach a no deal deadline, signaling to prepare for a ‘hard Brexit’ or ‘Australian-option’ trade agreement, depending on your Brexit stance, is already impacting rates. The lack of an agreement could revive flight to quality trades as we cross into the new year.Against this backdrop, Asia High Yield securities continued to outperform US HY, as in the last few weeks. Caa-rated US credits softened slightly, although by less than Ba and B rated securities. Risk remains over-bid and the consensus trade on rates, the dollar and trade is disconcerting. Regarding over-bid risk, please see <a href="https://www.smartkarma.com/insights/yes-bank-par-is-plenty-move-to-underweight" target="_blank" data-smartkarma-citation="insights:46120" rel="noopener">YES Bank: Par is Plenty- Move to Underweight</a>. As regards a trade to counter the over-consensus market, please see <a href="https://www.smartkarma.com/insights/societe-generale-at1-resolution-or-resilience-in-the-retail-restructuring-take-shorter-duration" target="_blank" data-smartkarma-citation="insights:46244" rel="noopener">Société Générale AT1: Resolution or Resilience in the Retail Restructuring? Take Shorter Duration</a>.Market Outlook: A strong start in Asia on the back of the US FDA approval of Pfizer’s vaccine may begin the week. However, the cognitive dissonance trade which ignores distribution and time extension risk may be overcome by a buy the rumor, sell the fact tactical trade since positive sentiment from vaccine news is already priced in. Event risk should take hold as the week progresses. With economic recovery increasingly priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction.

Three macro events this week should drive near term returns. The outcomes may appear fiendish to over-extended investors, much in the same way that Krampus, the mythical counterparty to St. Nicholas, taunts naughty children.The events include the outcome of the Fed’s Federal Open Market Committee meeting, the final week for the US Congress to agree addition US federal stimulus bill this year and the almost final week towards a Brexit deal. Resulting US dollar strength could snuff out the recent rally in Asia and broader EM US$-denominated credit.Expectations that the Fed could alter its bond purchase program at its upcoming meeting has limited bearish sentiment in the long end of the Treasury market. Look for a decision to extend the weighted average maturity of its bond purchases. The failure of the Fed to deliver could embolden the market to break a psychological 1% barrier on the 10-year Treasury bond. This would be beneficial to bank securities over the short term, especially if it occurs in tandem with continued bear steepening from the short end of the curve. However, this would raise the real effective rate and could be dollar negative. Asia and EM securities could react.Even if the Fed delivers what one-half of the market expects by altering its bond buying program, there are other extenuating circumstances that could result in a flight to quality, such as renewed lockdowns, the lack of a federal fiscal package and / or Brexit agreement. In a reversal of the recent trend of bad news = buy, the lack of federal stimulus would lower risk sentiment. We remain unconvinced that an actual agreement is the underlying goal of these negotiations. Control of the US Senate is at stake and the political posturing plays right into that race. Failure to reach an agreement would move all eyes to the Senate run-off races in January. Please see out last weekly, The New Equation is Bad News = Buy, for more details. The continuing saga of Brexit negotiations may also change investor risk preferences. As we approach a no deal deadline, signaling to prepare for a ‘hard Brexit’ or ‘Australian-option’ trade agreement, depending on your Brexit stance, is already impacting rates. The lack of an agreement could revive flight to quality trades as we cross into the new year.Against this backdrop, Asia High Yield securities continued to outperform US HY, as in the last few weeks. Caa-rated US credits softened slightly, although by less than Ba and B rated securities. Risk remains over-bid and the consensus trade on rates, the dollar and trade is disconcerting. Regarding over-bid risk, please see YES Bank: Par is Plenty- Move to Underweight. As regards a trade to counter the over-consensus market, please see Société Générale AT1: Resolution or Resilience in the Retail Restructuring? Take Shorter Duration.Market Outlook: A strong start in Asia on the back of the US FDA approval of Pfizer’s vaccine may begin the week. However, the cognitive dissonance trade which ignores distribution and time extension risk may be overcome by a buy the rumor, sell the fact tactical trade since positive sentiment from vaccine news is already priced in. Event risk should take hold as the week progresses. With economic recovery increasingly priced-into risk assets but mispriced in risk-free assets due to central bank policies, the ability to hedge market downturns may be impaired. This could exacerbate a market correction.

Bank Credit Weekly: Krampus Is Coming to Town: Fed, Stimulus & Brexit to Taunt Over-Eager Investors

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 Credit Compass: Regime Change May Limit the Annual January Bounce

Goldilocks may morph into a market wolf if the US Senate changes hands while 100 mask wearing days haunts of Carter-like sentiment. This is not...

Hank Calenti, CFA

Bank Credit Strategy: Q1 Glass Half Full as Market Dynamics Overwhelm Relative Valuations

Ongoing market dynamics may overwhelm relative valuations. Asia’s bank credit indexes are likely to see positive Q1 returns, albeit at relatively...

Hank Calenti, CFA

Bank Credit Weekly: Asia’s Higher Risk Notes Outperform in Thin Markets

Asia’s AT1, Subordinated and high yield Senior Unsecured bonds outperformed over the holiday shortened week. Thin markets were directionless, so we...

Hank Calenti, CFA

Bank Credit Weekly: Fed Spikes While the ECB Sweetens the Punch Bowl

The Fed spikes while the ECB sweetens the seasonal punch bowl. US stimulus may add the moonshine. This could be a festive week for bank securities....

Hank Calenti, CFA

Bank Credit Weekly: Krampus Is Coming to Town: Fed, Stimulus & Brexit to Taunt Over-Eager Investors

3-macro event outcomes this week may taunt over-eager investors. US-$ strength could halt the recent rally in Asia and broader EM US$-denominated...

Hank Calenti, CFA

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