Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

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

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

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

Executive Summary: Looks can be deceiving when considering performance potential in newly issued securities. While the issuance spread may be wider than peers, this is only one-half of the story. We consider the other half as it relates to <a href="https://www.smartkarma.com/entities/ubs-group-ag-e82c0d58-83f2-4e12-bcb6-976202a4e200" target="_blank" data-smartkarma-citation="entities:27909:1" rel="noopener">UBS (UBSG SW)</a> and <a href="https://www.smartkarma.com/entities/jyske-bank-a-s" target="_blank" data-smartkarma-citation="entities:22404:1" rel="noopener">Jyske Bank's (JYSK DC)</a> recently issued AT1 bonds and we ponder the potential in Oman Arab Bank’s security.

Executive Summary: Looks can be deceiving when considering performance potential in newly issued securities. While the issuance spread may be wider than peers, this is only one-half of the story. We consider the other half as it relates to UBS (UBSG SW) and Jyske Bank's (JYSK DC) recently issued AT1 bonds and we ponder the potential in Oman Arab Bank’s security.  

New Issue Machinations – Looks Can Be Deceiving

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

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

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

Executive Summary: It may be time to take duration, at least through the summer. Swap spread trends suggest to us that interest rates may have peaked over the near term, or at least until the Fed decides to talk about talking about tapering its asset purchases. We do not anticipate this discussion before next year.US inflation hit its highest annualized rate since 1995 and, after a brief spike upwards, interest rates were no more volatile than in prior weeks without significant data announcements. In fact, the Treasury curve barely moved week-on-week while Fed Fund rate expectations rose slightly.Credit spreads continue to track interest rates with shorter-end securities outperforming on a total return basis, while intermediate four-to-five-year spreads outperformed on pure credit terms. There was consistent performance across geographies, across the curve and across bank bond asset classes. European bank credit continues to slightly outperform Asia, although this may be tempered as Bund rates rise.Spread compression is likely to remain driven by economic growth expectations with lower rated high yield securities having a higher beta to the economic recovery. Higher grade securities remain defensive and expensive from a total return perspective.In the primary market, a jumbo-sized bond by <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag" target="_blank" data-smartkarma-citation="entities:22253:1" rel="noopener">Credit Suisse (CSGN VX)</a> took issuance to almost US$11 billion for a second week in a row. Credit Suisse Group’s Senior Unsecured note priced in-line with its curve. <a href="https://www.smartkarma.com/entities/danske-bank-a-s" target="_blank" data-smartkarma-citation="entities:22336:1" rel="noopener">Danske Bank's (DANSKE DC)</a> Additional Tier 1 may be more interesting for investors.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender.

Executive Summary: It may be time to take duration, at least through the summer. Swap spread trends suggest to us that interest rates may have peaked over the near term, or at least until the Fed decides to talk about talking about tapering its asset purchases. We do not anticipate this discussion before next year.US inflation hit its highest annualized rate since 1995 and, after a brief spike upwards, interest rates were no more volatile than in prior weeks without significant data announcements. In fact, the Treasury curve barely moved week-on-week while Fed Fund rate expectations rose slightly.Credit spreads continue to track interest rates with shorter-end securities outperforming on a total return basis, while intermediate four-to-five-year spreads outperformed on pure credit terms. There was consistent performance across geographies, across the curve and across bank bond asset classes. European bank credit continues to slightly outperform Asia, although this may be tempered as Bund rates rise.Spread compression is likely to remain driven by economic growth expectations with lower rated high yield securities having a higher beta to the economic recovery. Higher grade securities remain defensive and expensive from a total return perspective.In the primary market, a jumbo-sized bond by Credit Suisse (CSGN VX) took issuance to almost US$11 billion for a second week in a row. Credit Suisse Group’s Senior Unsecured note priced in-line with its curve. Danske Bank's (DANSKE DC) Additional Tier 1 may be more interesting for investors.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender.

Bank Credit Weekly: Inflation Non-Event Suggests Time to Take Duration?

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 rose 1.2% yesterday and Nasdaq was up 0.7%, slightly recovering losses in the prior few days. US 10Y yields had risen ~10bp to 1.70% on Wednesday in the aftermath of the inflation report , but cooled-off yesterday to 1.66%. Headline and Core CPI rose by 4.2% and 3% YoY, significantly above forecasts even after accounting for base effects causing a rout in equities. Despite the rise in inflation, Fed’s Vice-Chair Richard Clarida played down fears  citing transitory factors. Oil prices dropped 3% as the US pipeline reopened after the cyber attack after paying a $5mn ransom to the hackers. US IG CDS spreads tightened 1.5bp and HY spreads tightened 6.6bp. EU main and crossover spreads tightened 0.4bp and 1.8bp. Asian equity indices have started positive, up over 1% while Asia ex-Japan CDS spreads are 2.8bp wider.

Macro; Rating Changes; New 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 Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

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

Hank Calenti, CFA

New Issue Machinations – Looks Can Be Deceiving

Looks can be deceiving in newly issued securities. We look behind the headline numbers to assess AT1 performance potential.

Hank Calenti, CFA

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

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

Hank Calenti, CFA

Bank Credit Weekly: Inflation Non-Event Suggests Time to Take Duration?

Time to take duration? At the same time, high yield securities have a higher beta to the economy. As such, long duration, high yield may offer...

Hank Calenti, CFA

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

S&P rose 1.2% yesterday and Nasdaq was up 0.7%, slightly recovering losses in the prior few days. US 10Y yields had risen ~10bp to 1.70% on...

BondEvalue

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