Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The risk-on rally gathered steam as a lower than anticipated U.S. jobs report added to a confluence of pressures already driving the U.S. yield curve steeper. The jobs report added to the narrative that additional US federal stimulus is needed. This confirmed the risk-on sentiment.In addition to stimulus expectations, hedging activity in the swap market may also be driving rates higher as insurance companies immunize equity gains and short positioned investors grab protection. Ten-year and 30-year yields rose 10 and 14 basis points, respectively, week-on-week to end at 1.17% and 1.97%.Concurrently, carry considerations amid low repo rates are driving short-end rates lower. Excess liquidity and the expectation of even more liquidity aided in collapsing overnight interest rates and driving two-year yields to record lows. Investors that focus on high-quality short-term securities may be pushed further up the curve to grab yield.  This flood of cash could drive credit spreads even lower.Meanwhile, US Treasury supply prospects in the short term are dropping. The Treasury indicated that it would reduce its cash balances in half, to $800 billion by the end of March, followed by a further cut of $500 billion by the end of June. This should boost bank reserves sharply, depress money market rates and likely provide a boost to risk assets as investors reach further out the curve to remain invested.Upward pressure on the long-end combined with downward pressure on the short-end to steepen the Treasury curve materially. Bank stocks jumped in response to the weakness in long-end Treasuries and the steeper yield curve that resulted. Once again this showcases the high correlation between rates and equity value.In this environment, U.S. CCC-rated and Asia High Yield (HY) index spreads tightened. CCC’s jumped 64 basis points (bps) tighter week-on-week while Asia HY walked-in 14bps. US HY credit should have limited upside in a reflation scenario and a delay should benefit Asia-headquartered risk assets. Therefore, we wonder if we are witnessing the opposite.Market Outlook: The catalyst for a correction is outsized fiscal stimulus combined with overly accommodative monetary policy. Near-term, stimulus materially greater than $1 trillion may arrest short-end yield-compression. Short rates could rise, and this may not be bank valuation positive. Longer term, former Treasury Secretary Larry Summer’s warning on using valuable fiscal space may come back to haunt if inflation outpaces the recovery in credit fundamentals. This would not be EM credit valuation positive.

The risk-on rally gathered steam as a lower than anticipated U.S. jobs report added to a confluence of pressures already driving the U.S. yield curve steeper. The jobs report added to the narrative that additional US federal stimulus is needed. This confirmed the risk-on sentiment.In addition to stimulus expectations, hedging activity in the swap market may also be driving rates higher as insurance companies immunize equity gains and short positioned investors grab protection. Ten-year and 30-year yields rose 10 and 14 basis points, respectively, week-on-week to end at 1.17% and 1.97%.Concurrently, carry considerations amid low repo rates are driving short-end rates lower. Excess liquidity and the expectation of even more liquidity aided in collapsing overnight interest rates and driving two-year yields to record lows. Investors that focus on high-quality short-term securities may be pushed further up the curve to grab yield.  This flood of cash could drive credit spreads even lower.Meanwhile, US Treasury supply prospects in the short term are dropping. The Treasury indicated that it would reduce its cash balances in half, to $800 billion by the end of March, followed by a further cut of $500 billion by the end of June. This should boost bank reserves sharply, depress money market rates and likely provide a boost to risk assets as investors reach further out the curve to remain invested.Upward pressure on the long-end combined with downward pressure on the short-end to steepen the Treasury curve materially. Bank stocks jumped in response to the weakness in long-end Treasuries and the steeper yield curve that resulted. Once again this showcases the high correlation between rates and equity value.In this environment, U.S. CCC-rated and Asia High Yield (HY) index spreads tightened. CCC’s jumped 64 basis points (bps) tighter week-on-week while Asia HY walked-in 14bps. US HY credit should have limited upside in a reflation scenario and a delay should benefit Asia-headquartered risk assets. Therefore, we wonder if we are witnessing the opposite.Market Outlook: The catalyst for a correction is outsized fiscal stimulus combined with overly accommodative monetary policy. Near-term, stimulus materially greater than $1 trillion may arrest short-end yield-compression. Short rates could rise, and this may not be bank valuation positive. Longer term, former Treasury Secretary Larry Summer’s warning on using valuable fiscal space may come back to haunt if inflation outpaces the recovery in credit fundamentals. This would not be EM credit valuation positive.

Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus

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

US markets saw another move higher as S&amp;P and Nasdaq were up 1.1% and 1.2%. US jobless claims dipped by 33k to 779k last week while expected progress towards passing President Biden’s $1.9trn fiscal relief bill helped keep sentiment positive. US Treasury yields firmed with the 5s30s at its steepest level since Oct 2015  (Term of the day: curve steepening, explained below) trading at 147.3bp. “Economic activity is going up and it is already going to be fairly strong… More stimulus just makes the already strong number stronger” said Tom Porcelli, chief US economist at RBC Capital Markets. In the Eurozone, Italy’s FTSE MIB outperformed, up 1.65% a day after former ECB chief Draghi agreed to try and form a new government. US IG CDS spreads were 1.3bp tighter and HY was 7bp tighter. EU main CDS spreads tightened 0.7bp and crossover spreads tightened 4bp. Asia ex-Japan CDS spreads are 0.2bp tighter while Asian equities are ~0.5% higher today.

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

S&amp;P and Nasdaq continued to climb higher, up 1.4% and 1.6% respectively. All sectors were in the green with financials and industrials rallying the most, up over 2% higher while the FAANGs continued to trade higher. According to CNN, US Senate Democrats have reportedly said that President Biden did not discuss lowering the $1.9tn size on the Covid relief package during a virtual meeting. US 10Y Treasury yields firmed 2bp. FTSE was up 0.8%, though it underperformed European indices with reports of the new Covid variant reducing vaccine efficacy while DAX and CAC were 1.6% and 1.9% higher. US IG CDS spreads were 2.2bp tighter and HY was 10.6bp tighter. EU main CDS spreads tightened 1.5bp and crossover spreads tightened 9.6bp. Asia ex-Japan CDS spreads are 1.2bp tighter while Asian equities are ~0.2% higher today.

IRFC, Pertamina Launch $ Bonds; Macro; Rating Changes; New Bond Issues; Talking Heads; Top Gainer...

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

A pack of small, but smart, investors in a free and open market caught hedge funds off guard this week. The hunter was hunted, and the resulting equity market volatility drove financial concerns more than financial conditions. The GameStop situation is noise and not a signal for risk assets. For a nasty global risk asset unwind, there needs to be a catalyst in the form of either an economic downturn or a material tightening in Fed policy. Neither is in play. Weakness in Asia High Yield this week may create opportunities.More importantly, for credit investors, short-term Libor levels hit record lows on Friday. This matters as investors that focus on high-quality short-term securities may be pushed into commercial paper or other very short-duration paper. The rate curve should bull steepening from the excess amount of cash in the market. The flood of cash could drive credit yields even lower.In this environment, U.S. CCC-rated and Asia High Yield index spreads widened.  More and more brokerage houses are recommending Asia High Yield as the place to be in 2021, despite property developer concerns in China. Our take is that fundamentals have yet to catch-up with spreads in the US CCC-rated area although we suspect that they may. However, US High Yield has a higher effective duration now, versus pre-Covid, and versus Asia High Yield. As such US High Yield credits have more limited upside in the reflation scenario. A delay in the reflation scenario should benefit Asia-headquartered risk assets.At the same time, ivory-tower syndrome has taken over the Fed. Chairman Powell’s comments this week that what is really driving asset prices is not monetary policy, suggests that the disconcerting disconnect between financial and economic conditions is not understood by senior policymakers. If the Chairman’s comments were true, then there would be no need to signal a tapering of asset purchases well in advance. Whether you call it price fixing or price guidance by the Fed and ECB policymakers, it does not matter as you cannot fight it. The Fear of Missing Out (FOMO) is real in the credit markets.Despite these challenges, Asia’s bank spreads continued to tighten during the week. Officials in India anticipate 11% GDP growth in ’21-’22 from April, following vaccination, in-line with the 11.5% and 8.1% projected for India and China, respectively, by the IMF. The near-term future is in South Asian, but this may not apply to all India-headquartered banks. We also note that significant bank recapitalized in needed for these forecasts to materialize. Please see <a href="https://www.smartkarma.com/insights/yes-bank-solvency-simulation-with-covid-19-coverage-scenarios" target="_blank" data-smartkarma-citation="insights:47523" rel="noopener">YES Bank Solvency Simulation with Covid-19 Coverage Scenarios</a> for an example of the difficulties facing India-headquartered banks.Market Outlook: GameStop is noise and not a signal. Although weakening in some markets, economic growth and continued monetary accommodation remain the main drivers for credit markets. Credit fundamentals should catch-up with repressed credit spreads. Therefore, credit has limited upside in a fast reflation scenario. Reconciliation or negotiation may deliver the same stimulus result over the near term.  As such, a slower, more contained, reflation environment could be Emerging Market credit supportive.

A pack of small, but smart, investors in a free and open market caught hedge funds off guard this week. The hunter was hunted, and the resulting equity market volatility drove financial concerns more than financial conditions. The GameStop situation is noise and not a signal for risk assets. For a nasty global risk asset unwind, there needs to be a catalyst in the form of either an economic downturn or a material tightening in Fed policy. Neither is in play. Weakness in Asia High Yield this week may create opportunities.More importantly, for credit investors, short-term Libor levels hit record lows on Friday. This matters as investors that focus on high-quality short-term securities may be pushed into commercial paper or other very short-duration paper. The rate curve should bull steepening from the excess amount of cash in the market. The flood of cash could drive credit yields even lower.In this environment, U.S. CCC-rated and Asia High Yield index spreads widened.  More and more brokerage houses are recommending Asia High Yield as the place to be in 2021, despite property developer concerns in China. Our take is that fundamentals have yet to catch-up with spreads in the US CCC-rated area although we suspect that they may. However, US High Yield has a higher effective duration now, versus pre-Covid, and versus Asia High Yield. As such US High Yield credits have more limited upside in the reflation scenario. A delay in the reflation scenario should benefit Asia-headquartered risk assets.At the same time, ivory-tower syndrome has taken over the Fed. Chairman Powell’s comments this week that what is really driving asset prices is not monetary policy, suggests that the disconcerting disconnect between financial and economic conditions is not understood by senior policymakers. If the Chairman’s comments were true, then there would be no need to signal a tapering of asset purchases well in advance. Whether you call it price fixing or price guidance by the Fed and ECB policymakers, it does not matter as you cannot fight it. The Fear of Missing Out (FOMO) is real in the credit markets.Despite these challenges, Asia’s bank spreads continued to tighten during the week. Officials in India anticipate 11% GDP growth in ’21-’22 from April, following vaccination, in-line with the 11.5% and 8.1% projected for India and China, respectively, by the IMF. The near-term future is in South Asian, but this may not apply to all India-headquartered banks. We also note that significant bank recapitalized in needed for these forecasts to materialize. Please see YES Bank Solvency Simulation with Covid-19 Coverage Scenarios for an example of the difficulties facing India-headquartered banks.Market Outlook: GameStop is noise and not a signal. Although weakening in some markets, economic growth and continued monetary accommodation remain the main drivers for credit markets. Credit fundamentals should catch-up with repressed credit spreads. Therefore, credit has limited upside in a fast reflation scenario. Reconciliation or negotiation may deliver the same stimulus result over the near term.  As such, a slower, more contained, reflation environment could be Emerging Market credit supportive.

Bank Credit Weekly: GameStop Is Noise, Not a Signal, for Risk Assets

Singapore

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

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Asia High Yield Bond Index (AHYG SP)

Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus

A confluence of pressures drove the U.S. yield curve steeper. Outsized stimulus combined with overly accommodative monetary policy is the catalyst...

Hank Calenti, CFA

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

US markets saw another move higher as S&P and Nasdaq were up 1.1% and 1.2%. US jobless claims dipped by 33k to 779k last week while expected...

BondEvalue

IRFC, Pertamina Launch $ Bonds; Macro; Rating Changes; New Bond Issues; Talking Heads; Top Gainer...

S&P and Nasdaq continued to climb higher, up 1.4% and 1.6% respectively. All sectors were in the green with financials and industrials rallying...

BondEvalue

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Credit tourists may vacate if economic growth and real credit fundaments are not delivered. The gap between credit spreads and fundamentals is...

Hank Calenti, CFA

Bank Credit Weekly: GameStop Is Noise, Not a Signal, for Risk Assets

GME is noise, not a signal. Economic growth and monetary policy remain the drivers for credit markets. Reconciliation or negotiation equal the same...

Hank Calenti, CFA

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