Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: Light trading volumes, an issuance holiday and technical asset purchase expectations flattened the US Treasury curve during the week. Bank credit largely underperformed in what appeared to be a carry-trade unwind. All recent higher coupon outperformers experienced large spread declines. We do not expect this to continue as US growth and inflation expectations rise.We think this past week was an aberration, owing to thin markets, a lack of conviction pre-earnings season and concerns on the virus versus vaccine front. There is clear volume-, issuance- and data-risk for the market to contend with next week. We outline these within.Furthermore, we anticipate that market sentiment will revert to concerns regarding possible over-heating in the US economy, which in turn, would lead to a return of Treasury yield curve steepening. The sweet spot of long duration, low investment grade and BB rated bonds would revisit the market. This is a repositioning opportunity. Please see <a href="https://www.smartkarma.com/compose/insight/50207/Bank%20Credit%20Compass:%20Positive%20Total%20Return%20Sweet%20Spot.%20Read%20more:%20https:/skr.ma/2gzmu" target="_blank" rel="noopener">Bank Credit Compass: Positive Total Return Sweet Spot</a> for more details.US banks kick off the season with reports from JPMorgan Chase, Goldman Sachs and Wells Fargo on Wednesday, 14 April. Although trading revenues may be flat on a full-year basis over 2021, Q1 results could see these rise 10 to 15% year-on-year. Credit costs are anticipated to remain low with loan loss releases continuing although loan growth may still be missing. Net interest margins could remain depressed while interest revenue growth remains challenged.The Fed recently announced that it will remove dividend restrictions and allow US banks to restart share buy-backs from 30 June in those firms which pass the currently ongoing stress tests. As such, we anticipate a lot of talk, but no action, regarding this announcement in earnings teleconferences. Please see <a href="https://www.smartkarma.com/compose/insight/50207/US%20Banks%20and%20the%20SLR%20Situation:%20Overweight%20JPM%20Tier%201%20Securities.%20Read%20more:%20https:/skr.ma/g6CCF" target="_blank" rel="noopener">US Banks and the SLR Situation: Overweight JPM Tier 1 Securities</a> for our views on JPMorgan and its capital situation. Results for this year's test will be released by July 1.In Europe, we saw another market sensitive announcement from <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> last week. The firm outlined the likely impact from losses sustained in liquidating positions related to Archegos Capital Management. We do not see that press release as a reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than one-half the charges related to Archegos and this could result in the suspension of coupons on CS’ Contingent Capital securities. This leaves little room for maneuver. We continue to believe that Credit Suisse needs to enhance its capital base. Its CoCos may lag the market until the layer of capital is strengthened. Please see <a href="https://www.smartkarma.com/compose/insight/50207/Credit%20Suisse:%20Skating%20on%20a%20Thin%20Layer%20of%20Capital.%20Read%20more:%20https:/skr.ma/rGLd5" target="_blank" rel="noopener">Credit Suisse: Skating on a Thin Layer of Capital</a> and <a href="https://www.smartkarma.com/compose/insight/50207/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a> for more details.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Executive Summary: Light trading volumes, an issuance holiday and technical asset purchase expectations flattened the US Treasury curve during the week. Bank credit largely underperformed in what appeared to be a carry-trade unwind. All recent higher coupon outperformers experienced large spread declines. We do not expect this to continue as US growth and inflation expectations rise.We think this past week was an aberration, owing to thin markets, a lack of conviction pre-earnings season and concerns on the virus versus vaccine front. There is clear volume-, issuance- and data-risk for the market to contend with next week. We outline these within.Furthermore, we anticipate that market sentiment will revert to concerns regarding possible over-heating in the US economy, which in turn, would lead to a return of Treasury yield curve steepening. The sweet spot of long duration, low investment grade and BB rated bonds would revisit the market. This is a repositioning opportunity. Please see Bank Credit Compass: Positive Total Return Sweet Spot for more details.US banks kick off the season with reports from JPMorgan Chase, Goldman Sachs and Wells Fargo on Wednesday, 14 April. Although trading revenues may be flat on a full-year basis over 2021, Q1 results could see these rise 10 to 15% year-on-year. Credit costs are anticipated to remain low with loan loss releases continuing although loan growth may still be missing. Net interest margins could remain depressed while interest revenue growth remains challenged.The Fed recently announced that it will remove dividend restrictions and allow US banks to restart share buy-backs from 30 June in those firms which pass the currently ongoing stress tests. As such, we anticipate a lot of talk, but no action, regarding this announcement in earnings teleconferences. Please see US Banks and the SLR Situation: Overweight JPM Tier 1 Securities for our views on JPMorgan and its capital situation. Results for this year's test will be released by July 1.In Europe, we saw another market sensitive announcement from Credit Suisse (CSGN VX) last week. The firm outlined the likely impact from losses sustained in liquidating positions related to Archegos Capital Management. We do not see that press release as a reason to buy its Contingent Capital (CoCos). Credit Suisse is skating on thin ice from a capital perspective. Another loss of less than one-half the charges related to Archegos and this could result in the suspension of coupons on CS’ Contingent Capital securities. This leaves little room for maneuver. We continue to believe that Credit Suisse needs to enhance its capital base. Its CoCos may lag the market until the layer of capital is strengthened. Please see Credit Suisse: Skating on a Thin Layer of Capital and Credit Suisse: Where There’s Smoke, There’s a Capital Raise for more details.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Bank Credit Weekly: Repositioning Opportunity from Carry-Trade Unwind as the Treasury Curve Flattens

Executive Summary: Surprisingly strong US non-farm payroll results on Friday may push yields higher as we start the week. Thereafter, rising Covid-19 cases and vaccine distribution issues may impinge on market sentiment, generating bouts of Treasury buying, a higher US dollar and a risk-off environment in general. These are opportunities to restock and reconsider risk-asset allocations.In a holiday shortened trading week, US Treasury yields had a relatively mild reaction to President Biden’s announced US$2.25 trillion infrastructure investment proposal. The US bond market was not open when March’s initial non-farm payroll (NFP) figures were announced on Friday. The NFP numbers suggest that the US economy is about to run hot. This should stoke reflation concerns as near term growth expectations rise.Covid-19 travel restrictions increased in Ontario, Canada as well as the entirety of France for the month of April. Meanwhile, the Philippines extended Covid-19 related restrictions in Manlla for an additional week through Sunday, 11 April.Amongst Asia EM banks, Philippine bank equity continued their underperformance with the recent lock-down announcements, while China’s banks remained relatively unchanged following year-end result disclosures. Philippine bank shares are lagging their peers in Asia.China’s Banking and Insurance Regulatory Commission (CBIRC) outlined its proposals for additional capital buffers that would apply to domestically significant financial institutions. S&amp;P estimates that the largest banks need to issue as much as 6.5 trillion-yuan ($990 billion) in total loss-absorbing capacity (TLAC) debt capital by 2024 in order to meet Basel TLAC guidelines. We should see a build-up of this debt capital over the next few years with a material portion in non-local currency instruments. In Europe, Monday’s announcement 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> that losses from exiting Archegos Capital Management could be “highly significant and material” had a materially adverse impact on investor sentiment regarding the firm. We noted in late February that CS’ risk tolerance exceeded that of its peers while its risk management appeared to have challenges. We were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $94. Please see <a href="https://www.smartkarma.com/compose/insight/49970/Credit%20Suisse:%20Where%20There%E2%80%99s%20Smoke,%20There%E2%80%99s%20a%20Capital%20Raise.%20Read%20more:%20https:/skr.ma/yxeJd" target="_blank" rel="noopener">Credit Suisse: Where There’s Smoke, There’s a Capital Raise</a> for more details.In Asia, long duration Subordinated, and Additional Tier 1 (AT1) bank bonds outperformed as Treasury notes sold-off slightly during the week. Concurrently, the belly of the European bank debt curve outperformed as these bonds narrowed by more than weakness in five-year Treasury’s.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Executive Summary: Surprisingly strong US non-farm payroll results on Friday may push yields higher as we start the week. Thereafter, rising Covid-19 cases and vaccine distribution issues may impinge on market sentiment, generating bouts of Treasury buying, a higher US dollar and a risk-off environment in general. These are opportunities to restock and reconsider risk-asset allocations.In a holiday shortened trading week, US Treasury yields had a relatively mild reaction to President Biden’s announced US$2.25 trillion infrastructure investment proposal. The US bond market was not open when March’s initial non-farm payroll (NFP) figures were announced on Friday. The NFP numbers suggest that the US economy is about to run hot. This should stoke reflation concerns as near term growth expectations rise.Covid-19 travel restrictions increased in Ontario, Canada as well as the entirety of France for the month of April. Meanwhile, the Philippines extended Covid-19 related restrictions in Manlla for an additional week through Sunday, 11 April.Amongst Asia EM banks, Philippine bank equity continued their underperformance with the recent lock-down announcements, while China’s banks remained relatively unchanged following year-end result disclosures. Philippine bank shares are lagging their peers in Asia.China’s Banking and Insurance Regulatory Commission (CBIRC) outlined its proposals for additional capital buffers that would apply to domestically significant financial institutions. S&amp;P estimates that the largest banks need to issue as much as 6.5 trillion-yuan ($990 billion) in total loss-absorbing capacity (TLAC) debt capital by 2024 in order to meet Basel TLAC guidelines. We should see a build-up of this debt capital over the next few years with a material portion in non-local currency instruments. In Europe, Monday’s announcement by Credit Suisse (CSGN VX) that losses from exiting Archegos Capital Management could be “highly significant and material” had a materially adverse impact on investor sentiment regarding the firm. We noted in late February that CS’ risk tolerance exceeded that of its peers while its risk management appeared to have challenges. We were fortunate to be ahead of the market with our Underweight recommendation on CS bonds. When we initiated this call, the CS 4.5% coupon 2030 callable Additional Tier 1 bond was trading close to par. It is now below $94. Please see Credit Suisse: Where There’s Smoke, There’s a Capital Raise for more details.In Asia, long duration Subordinated, and Additional Tier 1 (AT1) bank bonds outperformed as Treasury notes sold-off slightly during the week. Concurrently, the belly of the European bank debt curve outperformed as these bonds narrowed by more than weakness in five-year Treasury’s.Market Outlook: From 1 April, with the start of Japan’s fiscal year, Japanese investors are typically net buyers of risk assets over the following months. This adds to a seasonality affect that usually pushes risk assets higher while safe-haven securities retreat. April may be a positive month from a total return basis, provided US Treasuries do not sell-off materially on inflation concerns.

Bank Credit Weekly: Employment Numbers Confirm a Hot US Economy

Executive Summary:  Rapidly rising interest rates present a challenge for credit to generate positive total returns. Unfortunately, the upward sloping sawtooth pattern of rising US interest rates ended the month on an upswing. Credit spreads needed to compress by as much to generate positive total returns. Only a small handful of Asia’s US$-denominated bank bonds (x-Japan) managed to generate positive total returns during the month of March. This was concentrated in a select sweet spot.Long duration, low investment grade rated, and high BB rated bonds led tightening over the month. Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in March, as in February. One differentiating factor between March and February is the concentration amongst Thai- and South Korean-headquartered banks during March; however, these institutions are also the largest issuers of longer duration bank paper in Asia. As such, we see this as more of a duration, than a country story.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had an outstanding month with each of the +100 bonds that we track tightening during the month. Global monetary accommodation is in large part responsible for this spread compression. Credit fundamentals have yet to catch-up. Continued tightening, however, cannot be ruled out as credit tourists crowd-in and markets melt-up. Unfortunately for most, the recent tightening did not exceed the speed with which interest rates rose.Q1 2021 was a tough quarter for real money asset managers. We anticipate that US interest rates will continue to climb higher and may even accelerate their upward trajectory. If the trend is your friend and longer duration bonds continue to outperform, the risk is that of buying a bond which either has a higher level of volatility or is fully priced. With South Korean long-dated Senior Unsecured notes trading just north of 100 basis points (bps), it is hard to imagine these notes continuing to compress faster than interest rates. Asset managers may need to consider more subordinated, higher yielding notes to generate positive total returns over the near term. Investors will likely be pushed towards lower rated Additional Tier 1 (AT1) bonds in April / May to achieve positive total returns. Security selection may become more important.

Executive Summary:  Rapidly rising interest rates present a challenge for credit to generate positive total returns. Unfortunately, the upward sloping sawtooth pattern of rising US interest rates ended the month on an upswing. Credit spreads needed to compress by as much to generate positive total returns. Only a small handful of Asia’s US$-denominated bank bonds (x-Japan) managed to generate positive total returns during the month of March. This was concentrated in a select sweet spot.Long duration, low investment grade rated, and high BB rated bonds led tightening over the month. Lower risk tolerance, as evidenced by the rating preferences, combined with duration desires to drive performance in March, as in February. One differentiating factor between March and February is the concentration amongst Thai- and South Korean-headquartered banks during March; however, these institutions are also the largest issuers of longer duration bank paper in Asia. As such, we see this as more of a duration, than a country story.From a pure credit spread perspective, ignoring movements in the risk-free rate, Asia’s bank bonds had an outstanding month with each of the +100 bonds that we track tightening during the month. Global monetary accommodation is in large part responsible for this spread compression. Credit fundamentals have yet to catch-up. Continued tightening, however, cannot be ruled out as credit tourists crowd-in and markets melt-up. Unfortunately for most, the recent tightening did not exceed the speed with which interest rates rose.Q1 2021 was a tough quarter for real money asset managers. We anticipate that US interest rates will continue to climb higher and may even accelerate their upward trajectory. If the trend is your friend and longer duration bonds continue to outperform, the risk is that of buying a bond which either has a higher level of volatility or is fully priced. With South Korean long-dated Senior Unsecured notes trading just north of 100 basis points (bps), it is hard to imagine these notes continuing to compress faster than interest rates. Asset managers may need to consider more subordinated, higher yielding notes to generate positive total returns over the near term. Investors will likely be pushed towards lower rated Additional Tier 1 (AT1) bonds in April / May to achieve positive total returns. Security selection may become more important.

Bank Credit Compass: Positive Total Return Sweet Spot

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

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

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

Bond market data and technology, BondEvalue

BondEvalue

Bond market data and technology

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

Bond Market Data and Technology

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

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

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

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Bank Credit Weekly: Repositioning Opportunity from Carry-Trade Unwind as the Treasury Curve Flattens

A confluence of thin volumes, trading holidays and technicals flattened the US rate curve. Bank credit underperformed in a carry-trade unwind. This...

Hank Calenti, CFA

Bank Credit Weekly: Employment Numbers Confirm a Hot US Economy

Strong US employment figures may push yields higher as we start the week. Thereafter, rising virus versus vaccine issues may impact market...

Hank Calenti, CFA

Bank Credit Compass: Positive Total Return Sweet Spot

The sweet spot for positive total returns seems to be in long duration, low investment grade, and high BB rated bonds. This was concentrated in...

Hank Calenti, CFA

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

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

Hank Calenti, CFA

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

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

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