Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The worse the economic news, the greater the expectation of US federal stimulus, the more the market rallies. Investors may be surprised to find that recent federal stimulus discussions are more appearance than substance. The balance of the US Senate is at stake and this posturing plays right into that election.Despite the overall improved risk tone, emerging market capital inflows flattened to remain at their highest levels since mid-February. This is surprising as almost everyone expects a weakening dollar next year. This is not a good sign. So long as yields are rising due to economic growth expectations, all is good; however, if yields are rising due to increasing inflation expectations, then a market correction is inevitable as investors re-assess policymaker’s commitment. Much depends on what and how the Fed communicates. Signs of wavering from overshooting inflation targets could spark a mini-taper tantrum.While global risk sentiment strengthened, Asia’s high yield markets outperformed the US indexes. Asia’s outperformance was likely due to more encouraging news from the region in terms of November’s PMIs which went down well with increased US federal stimulus expectations. Nonetheless, Asia’s HY index still has considerable room to catch-up with the US index. This difference was at its widest level in over 10-years recently and had hit a low of 1.45pp three months ago. This volatility seems overdone. We believe this to be due to US market irrational exuberance although increased concerns on the health of China’s debt issuers also played a part. Rising expectations for the Fed to take bond-supportive policy steps and the potential for another round of fiscal stimulus also play in the market dynamics. However, the Fed may not move before knowing the outcome of the Senate elections and federal stimulus discussions may be a false dawn. As such, we continue to suggest positioning for spread compression between the US and Asia HY indexes via the US Caa-rated index level.Within this environment, Asia’s High Yield bank bonds continued to outperform, although almost all bank bond prices rose on increased risk sentiment. Asia’s lowest rated bank bonds led in terms of spread outperformance. However, a Fed-influenced cap on US longer-term rates may not be bank friendly. We caution bank investors that Fed programs are forever, so be careful what you wish for. Remember when Quantitative Easing ended?Market Outlook: The question now is whether the federal stimulus discussion is about economic or political reality. We hope that our US federal stimulus cynicism is proven incorrect. Assuming we are incorrect, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns may then weigh on the market. The recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly due to the lack of Fed action in its asset purchase program. We are now more deeply set-up for buy-the-rumor, sell-the-fact profit taking.

The worse the economic news, the greater the expectation of US federal stimulus, the more the market rallies. Investors may be surprised to find that recent federal stimulus discussions are more appearance than substance. The balance of the US Senate is at stake and this posturing plays right into that election.Despite the overall improved risk tone, emerging market capital inflows flattened to remain at their highest levels since mid-February. This is surprising as almost everyone expects a weakening dollar next year. This is not a good sign. So long as yields are rising due to economic growth expectations, all is good; however, if yields are rising due to increasing inflation expectations, then a market correction is inevitable as investors re-assess policymaker’s commitment. Much depends on what and how the Fed communicates. Signs of wavering from overshooting inflation targets could spark a mini-taper tantrum.While global risk sentiment strengthened, Asia’s high yield markets outperformed the US indexes. Asia’s outperformance was likely due to more encouraging news from the region in terms of November’s PMIs which went down well with increased US federal stimulus expectations. Nonetheless, Asia’s HY index still has considerable room to catch-up with the US index. This difference was at its widest level in over 10-years recently and had hit a low of 1.45pp three months ago. This volatility seems overdone. We believe this to be due to US market irrational exuberance although increased concerns on the health of China’s debt issuers also played a part. Rising expectations for the Fed to take bond-supportive policy steps and the potential for another round of fiscal stimulus also play in the market dynamics. However, the Fed may not move before knowing the outcome of the Senate elections and federal stimulus discussions may be a false dawn. As such, we continue to suggest positioning for spread compression between the US and Asia HY indexes via the US Caa-rated index level.Within this environment, Asia’s High Yield bank bonds continued to outperform, although almost all bank bond prices rose on increased risk sentiment. Asia’s lowest rated bank bonds led in terms of spread outperformance. However, a Fed-influenced cap on US longer-term rates may not be bank friendly. We caution bank investors that Fed programs are forever, so be careful what you wish for. Remember when Quantitative Easing ended?Market Outlook: The question now is whether the federal stimulus discussion is about economic or political reality. We hope that our US federal stimulus cynicism is proven incorrect. Assuming we are incorrect, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns may then weigh on the market. The recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly due to the lack of Fed action in its asset purchase program. We are now more deeply set-up for buy-the-rumor, sell-the-fact profit taking.

Bank Credit Weekly: New Equation Is Bad News = Buy

Risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan) during the month of November. In fact, only 4 securities widened in G-Spread terms out of the 100 bonds that we track in the region. Meanwhile, the largest widening was only 15 basis points (bps) month-on-month.India-headquartered bank bonds led in terms of spread tightening over November and dominate our top 10 list. Amongst the India-headquartered banks, several non-bank finance companies (NBFCs) led advances. Relative to year-end spread levels, there is limited upside remaining amongst the top 10 performers of November.In a positive sign, from a momentum perspective, the positive spread movement amongst India’s NBFCs was continuous throughout November. Coronavirus vaccine news, a Goldilocks US election outcome, and the Janet Yellen effect propelled riskier asset prices higher in most markets and India was no exception.   While the trend is your friend, ordinarily thin trading markets could meet concerns that economic recovery is fully priced, and profit-taking may ensue during December. In addition, there is the risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. Post-COVID-19, India’s operating environment starts from an already high level of non-performing assets and each bank’s loan loss predictive ability has significant room for improvement. The same could be said for the other outperforming bank bonds in our top 10 list.

Risk-on sentiment resulted in more spread tightening than widening in Asia’s US$-denominated bank bonds (x-Japan) during the month of November. In fact, only 4 securities widened in G-Spread terms out of the 100 bonds that we track in the region. Meanwhile, the largest widening was only 15 basis points (bps) month-on-month.India-headquartered bank bonds led in terms of spread tightening over November and dominate our top 10 list. Amongst the India-headquartered banks, several non-bank finance companies (NBFCs) led advances. Relative to year-end spread levels, there is limited upside remaining amongst the top 10 performers of November.In a positive sign, from a momentum perspective, the positive spread movement amongst India’s NBFCs was continuous throughout November. Coronavirus vaccine news, a Goldilocks US election outcome, and the Janet Yellen effect propelled riskier asset prices higher in most markets and India was no exception.   While the trend is your friend, ordinarily thin trading markets could meet concerns that economic recovery is fully priced, and profit-taking may ensue during December. In addition, there is the risk that the market has gotten ahead of itself as bank management’s loss expectations are yet to be tested. Post-COVID-19, India’s operating environment starts from an already high level of non-performing assets and each bank’s loan loss predictive ability has significant room for improvement. The same could be said for the other outperforming bank bonds in our top 10 list.

Bank Credit Compass: Asia’s November Performance and December Expectations

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at <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>. One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-stable-deposits-and-costs-1-year-after-the-yes-bank-silent-run" target="_blank" data-smartkarma-citation="insights:43981" rel="noopener">Stable Deposits and Costs 1-Year After the Yes Bank Silent Run</a>. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-yes-stressed-deposit-flight-simulation" target="_blank" data-smartkarma-citation="insights:44213" rel="noopener">Yes-Stressed Deposit Flight Simulation</a>.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see <a href="https://www.smartkarma.com/insights/india-headquartered-banks-missing-deposit-miasma-1-year-after-yes-bank-s-silent-run" target="_blank" data-smartkarma-citation="insights:45438" rel="noopener">Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run</a>.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

In this, the fourth of several short insights in our Yes Bank Deposit Run Anniversary Series, we adjust Liquidity Coverage Ratios (LCR) for anticipated cash inflows which may not materialize in the current COVID-19 environment. We then append this result to deposits that are not captured in LCR reports derive a COVID-19 adjusted LCR.LCRs are based on a set of assumptions which may not prove to be valid during periods of stress, as recently occurred at Yes Bank (YES IN). One of the many assumptions is that cash inflows from performing loans can offset projected deposit outflows in a stressed situation. However, in an environment of widespread payment moratoriums or interest-only repayments, projected cashflow may be materially overstated. This could result in misleadingly higher LCR ratios. At the same time, some banks report non-lending related cash inflows at higher levels than projected loan-related amounts. This is surprising. As such, we remove all cash inflows to derive a cash inflow adjusted LCR. We also incorporate deposits that are not captured by the LCR report to derive a COVID-19 stressed LCR ratio and assess this ratio to see if this is priced-in from a credit perspective.Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios is not warranted as per recent experience.In our first insight, we derived the amount of stable deposits at each major India-headquartered bank and determined if a stable deposit franchise is priced-in, from a credit perspective. Please see Stable Deposits and Costs 1-Year After the Yes Bank Silent Run. In our second, we adjusted deposit flight assumption to the reality of what occurred at Yes Bank. We then determined if this “Yes-stressed” LCR is priced-in. Please see Yes-Stressed Deposit Flight Simulation.   In our third insight, we incorporated deposits that are not captured in LCR reports. This is the analysis required to understand what broke Yes Bank. We then determined if the Missing Deposit LCR is priced-in from a credit perspective. Please see Missing Deposit Miasma 1-Year After Yes Bank’s Silent Run.  In follow-up insights we intend to assess extraordinary government actions that recently inflated LCR ratios and then adjust for all of these elements for apocalyptic scenario analysis.

India-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. <a href="https://www.smartkarma.com/entities/vietnam-prosperity-jsc-bank" target="_blank" data-smartkarma-citation="entities:26914:1" rel="noopener">Vietnam Prosperity Bank (VPB VN)</a> and <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance (IIFL IN)</a>, a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the <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 (BNKEA)</a> complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see <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. In addition, <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank Public (BBL TB)</a> continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank (TMB TB)</a> widened 2bps. Please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> for our views. Finally, amongst Asia-centric banks, certain <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: <a href="https://www.smartkarma.com/insights/standard-chartered-legacy-tier-1-is-on-fire" target="_blank" data-smartkarma-citation="insights:45722" rel="noopener">Standard Chartered Legacy Tier 1 is on Fire</a> for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

The risk-on wave caught a bid in Asia high yield markets this week while positive momentum in US Caa-rated credits slowed. Asia’s outperformance was likely due to more encouraging news out of China. Top financial regulators in China stated that they would provide reasonable and sufficient liquidity as they handle a recent series of corporate credit defaults.In the US, the lowest rated Caa-component continued to rally on expectations that a meaningful economic restart will be brought forward. Positive reactions to vaccine news have grown steadily smaller as favorable outcomes are increasingly priced into the markets. The question is whether a complete re-opening of the global economy is fully priced. We re-iterate that the vaccine and election outcome news appear to be fully priced. We have full bull. It may be time to sell the vaccine and the goldilocks election result via the Caa tranche.Optimism surrounding the planned designation of former Fed Chairperson Janet Yellen as the new Treasury Secretary fueled Treasury market moves. Investors were relieved that President-elect Biden is choosing market-friendly moderates to fill his cabinet positions, rather than more socialist bent progressives. The choice of Janel Yellen as Treasury Secretary was particularly welcome by bank investors both due to her prior experience and because Biden did not choose Elisabeth Warren for the role. Nonetheless, Senator Warren's antagonism of the financial industry may gain weight should the Senate swing to a Democratic majority in the Georgia election run-offs.Against this backdrop, Asia’s HY Senior Unsecured bank bonds outperformed, although almost all bank bond prices rose in Asia’s risk-on environment. Vietnam Prosperity Bank (VPB VN) and IIFL Finance (IIFL IN), a non-bank finance company headquartered in India, led this performance, tightening by 45 basis points (bps) and 49bps, respectively. We suspect that the tension between vaccine news and Coronavirus contagion will increase volatility amongst higher yielding bank bonds although we anticipate downward sloping saw-tooth spread tightening over the near term.   Amongst Asia’s Additional Tier 1 (AT1) bonds, the Bank of East Asia (BNKEA) complex continued to outperform, with the 2024 and 2022 first call bonds tightening by 29 and 24bps, respectively. We recently moved to Outperform, from Buy, on BNKEA’s inefficient capital securities. Please see Move to Overweight the Capital Inefficient Securities, from Buy for more details. In addition, Bangkok Bank Public (BBL TB) continued to outperform its Thai-headquartered AT1 issuers by tightening 22bps while TMB Bank (TMB TB) widened 2bps. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views. Finally, amongst Asia-centric banks, certain Standard Chartered (STAN LN) bonds have greatly outperformed over the last few weeks on expectations of a potential tender offer by the firm to buy-back the securities. Please see: Standard Chartered Legacy Tier 1 is on Fire for more details.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Concerns that the recent surge in bullish sentiment raises the question of whether it is sustainable or if a correction may be around the corner, possibly with the final approval of various vaccine treatments. We are set-up for buy-the-rumor, sell-the-fact profit taking.

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

Credit risk markets remained decoupled between the US and Asia as spreads on US Caa-rated entities continued to defy gravity. The risk-on wave continued to swell through US risk asses on additional positive vaccine news. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, spreads on the US Caa-rated complex tightened to inside Asia’s HY index for the first time since 2014. Is it time to sell the Caa bull market?  Treasury Secretary Mnuchin’s decision to cancel several underutilized emergency Fed programs at the end of the year may raise expectations for the Fed to expand its asset purchase program or target its purchases more directly along the Treasury curve at its December meeting. We are set-up for disappointment.  Against this background, Asia’s HY Additional Tier 1 underperformed Subordinated and Senior Unsecured securities as near-term global growth concerns outweighed vaccine progress. Most of the underperforming bond were issued over the last three months. This suggests these may have been issued at the top of the market, in spread terms. Amongst Additional Tier 1 bonds, Hong Kong-headquartered banks led advances. <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> announcement that it would call its 5.5% coupon December-callable AT1 bond aided sentiment. We first recommended that investors overweight this security in mid-February within <a href="https://www.smartkarma.com/insights/bank-of-east-asia-overweight-short-call-at1-on-refinancing-ability" target="_blank" data-smartkarma-citation="insights:36787" rel="noopener">Bank of East Asia: Overweight Short-Call AT1 on Refinancing Ability</a> and recently re-iterated this call within <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">Bank of East Asia: Buy the Inefficient Capital Securities</a>. Victory lap over.Concurrently, Turkish HY Senior Unsecured bank bonds again materially outperformed their global peers following delivery of a more orthodox monetary policy regime. Nonetheless, Turkish bank bonds continue to trade wide of similarly rated entities in other emerging markets.  Given the starting point for a potential Turkish bank bond rally, we anticipate a virus versus vaccine market immunity in Turkish-bank bonds returns over the near term.   Over US$13 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. Amongst higher-yield issued securities, the UK Co-operative Bank’s Caa1 rated bond makes India’s <a href="https://www.smartkarma.com/entities/iifl-holdings-ltd" target="_blank" data-smartkarma-citation="entities:20197:1" rel="noopener">IIFL Finance's (IIFL IN)</a> US$-bond look cheap in comparison. However, unlike India where every bank rescue requires a liability moratorium, the Co-operative Bank resolution three years ago was not damaging to the financial system. India’s rescue of <a href="https://www.smartkarma.com/entities/lakshmi-vilas-bank-ltd" target="_blank" data-smartkarma-citation="entities:17552:1" rel="noopener">Lakshmi Vilas Bank (LVB IN)</a> this week is no exception. For our views on this please see: <a href="https://www.smartkarma.com/insights/lakshmi-vilas-bank-dbs-rescue-is-a-wasted-option" target="_blank" data-smartkarma-citation="insights:45471" rel="noopener">Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option</a>.US$-debt issuance should be slowed by the upcoming US holiday on Thursday. We could see a short-lived resurgence in early December and then drift sideways until heavy issuance re-emerges in January.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets.

Credit risk markets remained decoupled between the US and Asia as spreads on US Caa-rated entities continued to defy gravity. The risk-on wave continued to swell through US risk asses on additional positive vaccine news. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, spreads on the US Caa-rated complex tightened to inside Asia’s HY index for the first time since 2014. Is it time to sell the Caa bull market?  Treasury Secretary Mnuchin’s decision to cancel several underutilized emergency Fed programs at the end of the year may raise expectations for the Fed to expand its asset purchase program or target its purchases more directly along the Treasury curve at its December meeting. We are set-up for disappointment.  Against this background, Asia’s HY Additional Tier 1 underperformed Subordinated and Senior Unsecured securities as near-term global growth concerns outweighed vaccine progress. Most of the underperforming bond were issued over the last three months. This suggests these may have been issued at the top of the market, in spread terms. Amongst Additional Tier 1 bonds, Hong Kong-headquartered banks led advances. Bank of East Asia's (23 HK) announcement that it would call its 5.5% coupon December-callable AT1 bond aided sentiment. We first recommended that investors overweight this security in mid-February within Bank of East Asia: Overweight Short-Call AT1 on Refinancing Ability and recently re-iterated this call within Bank of East Asia: Buy the Inefficient Capital Securities. Victory lap over.Concurrently, Turkish HY Senior Unsecured bank bonds again materially outperformed their global peers following delivery of a more orthodox monetary policy regime. Nonetheless, Turkish bank bonds continue to trade wide of similarly rated entities in other emerging markets.  Given the starting point for a potential Turkish bank bond rally, we anticipate a virus versus vaccine market immunity in Turkish-bank bonds returns over the near term.   Over US$13 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. Amongst higher-yield issued securities, the UK Co-operative Bank’s Caa1 rated bond makes India’s IIFL Finance's (IIFL IN) US$-bond look cheap in comparison. However, unlike India where every bank rescue requires a liability moratorium, the Co-operative Bank resolution three years ago was not damaging to the financial system. India’s rescue of Lakshmi Vilas Bank (LVB IN) this week is no exception. For our views on this please see: Lakshmi Vilas Bank: DBS Rescue Is a Wasted Option.US$-debt issuance should be slowed by the upcoming US holiday on Thursday. We could see a short-lived resurgence in early December and then drift sideways until heavy issuance re-emerges in January.Market Outlook: Over the near term, tension between longer-term optimism from vaccine driven economies and the shorter-term reality of increasing Coronavirus lockdowns are likely to weigh on the market in the coming weeks. Positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets.

Bank Credit Weekly: Virus Vs. Vaccine: Time to Sell the Caa-Bull?

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 Weekly: New Equation Is Bad News = Buy

The worse the economic news, the greater the expectation of US federal stimulus, the more the market rallies. We are now more set-up for buy-the...

Hank Calenti, CFA

Bank Credit Compass: Asia’s November Performance and December Expectations

India-headquartered bank bonds led spread tightening over November. Ordinarily thin markets could meet concerns that economic recovery is fully...

Hank Calenti, CFA

India-Headquartered Banks: COVID-19 Adjusted Liquidity Coverage Ratios

COVID-19 adjusted LCRs exhibit an almost perfectly negative correlation with India-headquartered bank bond spreads. This is the 4’th of several...

Hank Calenti, CFA

Bank Credit Weekly: Play Safe in Asia or Ride the US Bull?

The risk-wave caught a bid in Asia HY while positive momentum in US Caa-rated credits slowed. We are set-up for buy-the-rumor, sell-the-fact profit...

Hank Calenti, CFA

Bank Credit Weekly: Virus Vs. Vaccine: Time to Sell the Caa-Bull?

Is it time to sell the Caa-bull market? Some AT1 bonds seem to be at a market top. We are set-up for disappointment. Nonetheless, we anticipate...

Hank Calenti, CFA

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