Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Ironically, a distracted and internally divided US Congress combined with an accommodative Fed could be bullish for risk assets and simultaneously reduce bearish fixed income pressures. For bond investors, it could be reassuring that the Goldilocks election outcome remains as political balances keep the US government from undertaking an even larger, more sustained, reflationary fiscal push. This could benefit Asia-headquartered risk assets.Some observers worry, rightly so, that the trial of former President Trump threatens to elongate the political divide in the U.S. This could make it more difficult for President Biden to effectively deliver on his fiscal spending plans in a timely manner while economic activity indicators soften. In addition, expectations that President Biden’s $1.9 trillion stimulus plan may be materially watered-down, by almost one-half, raised expectations that Fed accommodation would be extended longer than anticipated when the stimulus plan was first announced. As such, the current distraction may be credit positive. Meanwhile, U.S. CCC-rated indexes compressed into uncharted territory as CCC-index yields hit all-time lows. Asia risk asset followed, although the credit spread relationship between these two geographies remains far from the norm.  We note that credits only have limited upside in the reflation scenario.  Please see <a href="https://www.smartkarma.com/insights/bank-credit-weekly-moving-the-goal-posts" target="_blank" data-smartkarma-citation="insights:46889" rel="noopener">Bank Credit Weekly: Moving the Goal Posts</a> for more on this. A delay in the reflation scenario could also benefit Asia-headquartered risk assets.In addition, just as the US-dollar media narrative began to change from one of universal weakening to strengthening, US-dollar strengthening stopped. Declining odds on a large federal stimulus package likely arrested dollar strength. We present our US-dollar views inside and why it may be short-term Asia credit positive.Meanwhile, Fed officials are not reading from the same song sheet. Admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Please see last week’s <a href="https://www.smartkarma.com/insights/bank-credit-weekly-distractions-may-drive-markets-near-term" target="_blank" data-smartkarma-citation="insights:47117" rel="noopener">Bank Credit Weekly: Distractions May Drive Markets Near Term</a> for more on this. Fed Chairman Jerome Powell will discuss the FOMC’s decisions on Wednesday, 27 January.Against this backdrop, almost all of Asia’s bank debt tightened during the week. Improved risk sentiment, the arrest of a stronger US-dollar, EM inflows and country specific announcements drove these results. In particular, the Reserve Bank of India’s proposal to revise the regulatory framework for India’s non-bank finance companies likely had a positive impact on the US-dollar bonds of these institutions.Several Asia-headquartered banks reported earnings as the week ended and into the weekend. Asia bank earnings season is upon us. However, we note that asset quality indicators at many banks greatly underestimate the level of troubled debt within the institution as forbearance measures remain in place in several operating environments. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these earnings reports is significantly diminished for credit investors. As such, credit value should remain driven by larger market forces.Market Outlook: The distraction of another set of impeachment proceedings could turn out to be market friendly if it results in more targeted stimulus. Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Credit has limited upside in a fast reflation scenario. A slower, more contained, reflation environment could be Emerging Market credit supportive.

Ironically, a distracted and internally divided US Congress combined with an accommodative Fed could be bullish for risk assets and simultaneously reduce bearish fixed income pressures. For bond investors, it could be reassuring that the Goldilocks election outcome remains as political balances keep the US government from undertaking an even larger, more sustained, reflationary fiscal push. This could benefit Asia-headquartered risk assets.Some observers worry, rightly so, that the trial of former President Trump threatens to elongate the political divide in the U.S. This could make it more difficult for President Biden to effectively deliver on his fiscal spending plans in a timely manner while economic activity indicators soften. In addition, expectations that President Biden’s $1.9 trillion stimulus plan may be materially watered-down, by almost one-half, raised expectations that Fed accommodation would be extended longer than anticipated when the stimulus plan was first announced. As such, the current distraction may be credit positive. Meanwhile, U.S. CCC-rated indexes compressed into uncharted territory as CCC-index yields hit all-time lows. Asia risk asset followed, although the credit spread relationship between these two geographies remains far from the norm.  We note that credits only have limited upside in the reflation scenario.  Please see Bank Credit Weekly: Moving the Goal Posts for more on this. A delay in the reflation scenario could also benefit Asia-headquartered risk assets.In addition, just as the US-dollar media narrative began to change from one of universal weakening to strengthening, US-dollar strengthening stopped. Declining odds on a large federal stimulus package likely arrested dollar strength. We present our US-dollar views inside and why it may be short-term Asia credit positive.Meanwhile, Fed officials are not reading from the same song sheet. Admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Please see last week’s Bank Credit Weekly: Distractions May Drive Markets Near Term for more on this. Fed Chairman Jerome Powell will discuss the FOMC’s decisions on Wednesday, 27 January.Against this backdrop, almost all of Asia’s bank debt tightened during the week. Improved risk sentiment, the arrest of a stronger US-dollar, EM inflows and country specific announcements drove these results. In particular, the Reserve Bank of India’s proposal to revise the regulatory framework for India’s non-bank finance companies likely had a positive impact on the US-dollar bonds of these institutions.Several Asia-headquartered banks reported earnings as the week ended and into the weekend. Asia bank earnings season is upon us. However, we note that asset quality indicators at many banks greatly underestimate the level of troubled debt within the institution as forbearance measures remain in place in several operating environments. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these earnings reports is significantly diminished for credit investors. As such, credit value should remain driven by larger market forces.Market Outlook: The distraction of another set of impeachment proceedings could turn out to be market friendly if it results in more targeted stimulus. Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Credit has limited upside in a fast reflation scenario. A slower, more contained, reflation environment could be Emerging Market credit supportive.

Risk Assets Are Supported by a Distracted Congress and Accommodative Fed

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a dash of market volatility until greater clarity is found.The potential trial of outgoing President Trump could prolong the partisan sentiment of recent weeks and delay needed additional stimulus legislation. This may add a dash of volatility to the market as additional evidence of a cooling U.S. economy unfolds. In fact, initial optimism over President-elect Joe Biden’s stimulus proposal soured after some lawmakers pushed back, suggesting that it is far from a done deal.  Treasury yields ended the week flatter, after rising by mid-week, as stimulus distractions set in.Meanwhile, Fed officials are not reading from the same song sheet. We have been discussing the potential for a mid-to-late 2021 Fed induced market taper-tantrum since mid-Nov. The business media finally caught onto it this week.  However, admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Fed speak may distract as the market moves ahead to set its own expectations for when tapering may begin.Concurrently, this week’s earnings reports clearly showed that US banks are releasing loan loss reserves; however, this distraction may be misinterpreted. As we discuss within, US bank earnings are not a harbinger for what may occur in other markets. In fact, Bank of Italy Governor Visco noted this week that small and medium-sized banks could suffer most from the economic consequences of the pandemic. Rhetorically he asked if “this creates an unprecedented ‘too-many-to-fail’ problem?” We see this as an opening salvo to push for more access to government backed asset management companies to assist with restructuring banking systems. This may prove positive for Additional Tier 1 bonds; however, market prices may suffer before this comes to fruition. To wit, EU bank credit risk perceptions deteriorated despite US bank results.In Asia, the Reserve Bank of India (RBI) started draining liquidity from the banking system. Concurrently, three-year AAA, AA and BBB corporate bond yields rose. If India’s short-term rates could fall well below the policy rate, then the policy rate was misstated. This is more than a distraction. The tightening of monetary policy at this point is bizarre given that the RBI warned this week that a bad debt surge threatens India’s financial stability.Meanwhile in Hong Kong, easy money is all but gone in the banking system. There is no gain to be had from borrowing in US$ and lending in HKD in short-term markets. This is net interest income negative. It also incentivizes the banks to lend for longer and to lend further down the curve. Hong Kong bank credit underperformed this week.Against this backdrop, Asia’s higher risk Additional Tier 1 (AT1) bank bonds underperformed, principally driven by Thailand- and other higher risk China-centric securities, reversing last week’s outperformance. Thai banks underperformed in Tier 2 and AT1 notes although Senior Unsecured debt tightened as investors rotated to safer debt instruments with duration. Indonesian bank bonds may have sold-off in sympathy with concerns that Indonesia is more sensitive to a higher dollar than other Asian countries.Market Outlook: The US holiday shortened week may see less activity than usual given the uncertainty of when additional stimulus may get US Senate’ attention. The distraction of another set of impeachment proceedings may not be market friendly.  Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Breakeven rates suggest growth rather than inflation; however, credit has limited upside in a reflation scenario and duration is may not be your friend at this point in the cycle.

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a dash of market volatility until greater clarity is found.The potential trial of outgoing President Trump could prolong the partisan sentiment of recent weeks and delay needed additional stimulus legislation. This may add a dash of volatility to the market as additional evidence of a cooling U.S. economy unfolds. In fact, initial optimism over President-elect Joe Biden’s stimulus proposal soured after some lawmakers pushed back, suggesting that it is far from a done deal.  Treasury yields ended the week flatter, after rising by mid-week, as stimulus distractions set in.Meanwhile, Fed officials are not reading from the same song sheet. We have been discussing the potential for a mid-to-late 2021 Fed induced market taper-tantrum since mid-Nov. The business media finally caught onto it this week.  However, admonishing others to avoid asset purchase tapering discussions at the Fed is tantamount to a Say no Evil, Hear no Evil strategy. This is misguided as an open discussion could limit volatility once tapering begins. Fed speak may distract as the market moves ahead to set its own expectations for when tapering may begin.Concurrently, this week’s earnings reports clearly showed that US banks are releasing loan loss reserves; however, this distraction may be misinterpreted. As we discuss within, US bank earnings are not a harbinger for what may occur in other markets. In fact, Bank of Italy Governor Visco noted this week that small and medium-sized banks could suffer most from the economic consequences of the pandemic. Rhetorically he asked if “this creates an unprecedented ‘too-many-to-fail’ problem?” We see this as an opening salvo to push for more access to government backed asset management companies to assist with restructuring banking systems. This may prove positive for Additional Tier 1 bonds; however, market prices may suffer before this comes to fruition. To wit, EU bank credit risk perceptions deteriorated despite US bank results.In Asia, the Reserve Bank of India (RBI) started draining liquidity from the banking system. Concurrently, three-year AAA, AA and BBB corporate bond yields rose. If India’s short-term rates could fall well below the policy rate, then the policy rate was misstated. This is more than a distraction. The tightening of monetary policy at this point is bizarre given that the RBI warned this week that a bad debt surge threatens India’s financial stability.Meanwhile in Hong Kong, easy money is all but gone in the banking system. There is no gain to be had from borrowing in US$ and lending in HKD in short-term markets. This is net interest income negative. It also incentivizes the banks to lend for longer and to lend further down the curve. Hong Kong bank credit underperformed this week.Against this backdrop, Asia’s higher risk Additional Tier 1 (AT1) bank bonds underperformed, principally driven by Thailand- and other higher risk China-centric securities, reversing last week’s outperformance. Thai banks underperformed in Tier 2 and AT1 notes although Senior Unsecured debt tightened as investors rotated to safer debt instruments with duration. Indonesian bank bonds may have sold-off in sympathy with concerns that Indonesia is more sensitive to a higher dollar than other Asian countries.Market Outlook: The US holiday shortened week may see less activity than usual given the uncertainty of when additional stimulus may get US Senate’ attention. The distraction of another set of impeachment proceedings may not be market friendly.  Outside of the Washington beltway, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on when the Fed begins to taper its asset purchases. Breakeven rates suggest growth rather than inflation; however, credit has limited upside in a reflation scenario and duration is may not be your friend at this point in the cycle.

Bank Credit Weekly: Distractions May Drive Markets Near Term

Democratic Party control of the Senate has clearly moved the goal posts for fixed income investors. The reflation trade is back. This requires repositioning by bank credit investors.The good news is that the rise in Treasuries is beneficial to bank securities over the short term, especially since it is occurring in tandem with continued bear steepening from the short end of the curve. Globally, higher net interest margins should follow from the steepening of the U.S. yield curve as excess reserves are allocated into US$ securities. However, the impact on India-headquartered banks may be less as we discuss within.There are two less positive impacts. First, if the rise in rates is a reflection that inflation is expected to return, then this is not duration friendly. In fact, long duration fixed income securities suffered over the last week. Theoretically, credit curves should flatten in response to the yield curve steepening. However, given the enormous level of monetary accommodation over the last nine months, the question then becomes, how much further can spreads tighten? Credit only has limited upside in the current reflation scenario. Second, higher rates will raise the real effective US$ exchange rate. All else equal, a higher real effective US$ exchange rate is dollar positive.  Asia and emerging market (EM) securities could suffer.Against this backdrop, higher risk Additional Tier 1 (AT1) bank bonds outperformed, principally driven by Thailand- and other higher risk China-centric securities on expectations of increased economic activity. Thai banks performed across the credit continuum in Senior Unsecured, Tier 2 and AT1 notes. This seems to be a case of cognitive dissonance which ignores vaccine distribution and time extension risks. The COVID-19 situation is deteriorating in Thailand and elsewhere. High financial market valuations seem inconsistent with economic activity. A pronounced degradation of asset prices could materialize. Our preference is to fade the Thai-bank rally.France’s central bank noted that systemic risk may rise over the coming months due to high corporate debt and the current round of Covid-19 lockdowns. The regulator stated that a significant rise in defaults could occur in a slow economic recovery. Please see <a href="https://www.smartkarma.com/insights/bnp-paribas-capital-forbearance-and-cds" target="_blank" data-smartkarma-citation="insights:46684" rel="noopener">BNP Paribas: Capital, Forbearance and CDS</a> for our assessment of this situation.In addition, we note that<a href="https://www.smartkarma.com/entities/commerzbank-ag" target="_blank" data-smartkarma-citation="entities:21596:1" rel="noopener">Commerzbank AG (CBK GR)</a> set a high bar for balance sheet clean-up by announcing a 50% increase in loan loss provisions for COVID-19. We would not be surprised to see additional healthy increases in loan loss provisioning. In fact, credit investors should be concerned if there are limited additional provisions taken. US banks kick-off the global bank earnings season on Friday.Market Outlook: Absent another behavioral lapse by the US President, ebullience over the prospects of additional stimulus spending should continue to positively impact the markets. Another lapse by the US President could see a temporary rise in demand for safe-haven assets. Eventually, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on how the Fed reacts. In this environment, artificially engineered credit costs may come back to hurt bank investors. Credit only has limited upside in the current reflation scenario and duration is not your friend at this point in the cycle.

Democratic Party control of the Senate has clearly moved the goal posts for fixed income investors. The reflation trade is back. This requires repositioning by bank credit investors.The good news is that the rise in Treasuries is beneficial to bank securities over the short term, especially since it is occurring in tandem with continued bear steepening from the short end of the curve. Globally, higher net interest margins should follow from the steepening of the U.S. yield curve as excess reserves are allocated into US$ securities. However, the impact on India-headquartered banks may be less as we discuss within.There are two less positive impacts. First, if the rise in rates is a reflection that inflation is expected to return, then this is not duration friendly. In fact, long duration fixed income securities suffered over the last week. Theoretically, credit curves should flatten in response to the yield curve steepening. However, given the enormous level of monetary accommodation over the last nine months, the question then becomes, how much further can spreads tighten? Credit only has limited upside in the current reflation scenario. Second, higher rates will raise the real effective US$ exchange rate. All else equal, a higher real effective US$ exchange rate is dollar positive.  Asia and emerging market (EM) securities could suffer.Against this backdrop, higher risk Additional Tier 1 (AT1) bank bonds outperformed, principally driven by Thailand- and other higher risk China-centric securities on expectations of increased economic activity. Thai banks performed across the credit continuum in Senior Unsecured, Tier 2 and AT1 notes. This seems to be a case of cognitive dissonance which ignores vaccine distribution and time extension risks. The COVID-19 situation is deteriorating in Thailand and elsewhere. High financial market valuations seem inconsistent with economic activity. A pronounced degradation of asset prices could materialize. Our preference is to fade the Thai-bank rally.France’s central bank noted that systemic risk may rise over the coming months due to high corporate debt and the current round of Covid-19 lockdowns. The regulator stated that a significant rise in defaults could occur in a slow economic recovery. Please see BNP Paribas: Capital, Forbearance and CDS for our assessment of this situation.In addition, we note thatCommerzbank AG (CBK GR) set a high bar for balance sheet clean-up by announcing a 50% increase in loan loss provisions for COVID-19. We would not be surprised to see additional healthy increases in loan loss provisioning. In fact, credit investors should be concerned if there are limited additional provisions taken. US banks kick-off the global bank earnings season on Friday.Market Outlook: Absent another behavioral lapse by the US President, ebullience over the prospects of additional stimulus spending should continue to positively impact the markets. Another lapse by the US President could see a temporary rise in demand for safe-haven assets. Eventually, the real issue of how much is too much stimulus as the vaccine is rolled-out will lead to concerns on how the Fed reacts. In this environment, artificially engineered credit costs may come back to hurt bank investors. Credit only has limited upside in the current reflation scenario and duration is not your friend at this point in the cycle.

Bank Credit Weekly: Moving the Goal Posts

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.<a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank's (BBLTB)</a> 5% coupon and <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 (BNKEA)</a> 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance's (IHFLIN)</a> 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" data-smartkarma-citation="entities:547:1" rel="noopener">ICICI Bank's (ICICIBC IN)</a> and <a href="https://www.smartkarma.com/entities/canara-bank" target="_blank" data-smartkarma-citation="entities:543:1" rel="noopener">Canara Bank's (CBKIN)</a> debt curve sold off while <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank of India's (SBIIN)</a> notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see <a href="https://www.smartkarma.com/insights/bank-credit-compass-regime-change-may-limit-the-annual-january-bounce" target="_blank" data-smartkarma-citation="insights:46712" rel="noopener">Bank Credit Compass: Regime Change May Limit the Annual January Bounce</a>. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Asia’s Subordinated debt, both Additional Tier 1 (AT1) and Tier 2 bonds outperformed higher ranked Senior Unsecured notes over the holiday shortened week. We attribute this to a shift into higher duration exposure as most of the outperformers were 2025 or longer first call bonds.Bangkok Bank's (BBLTB) 5% coupon and Bank of East Asia's (BNKEA) 5 7/8% coupon AT1 bonds, both with 2025 first call dates, led amongst liquid securities. Indiabulls Housing Finance's (IHFLIN) 6 3/8% coupon 2022 maturity bond led performance amongst less liquid notes by tightening 41bps following last week’s 56bps performance. The bond now trades within 1300bps of its benchmark but remains very illiquid. Otherwise, high grade Senior Unsecured returns were dragged lower by India-based bank issuers. ICICI Bank's (ICICIBC IN) and Canara Bank's (CBKIN) debt curve sold off while State Bank of India's (SBIIN) notes saw mixed performance.Once again, thin markets were directionless over the last week, so we focus on bond performance in this note. For a deeper assessment of bank credit performance in December and an assessment of potential January outcomes, please see Bank Credit Compass: Regime Change May Limit the Annual January Bounce. Market Outlook: The Goldilocks market may morph into a market wolf if the US Senate changes leadership from the runoff races in Georgia. Higher stimulus could be offset by concerns of higher taxes and regulations. This could negatively impact the annual January market bounce. Concurrently, reduced economic activity over the near term from increased virus-related lockdowns may not be fully reflected in asset prices. Against this background, thin markets may exacerbate price moves over the next week.

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

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

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

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

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.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Asia High Yield Bond Index (AHYG SP)

Risk Assets Are Supported by a Distracted Congress and Accommodative Fed

Declining odds on a large US federal stimulus package likely arrested US-dollar strength. A slower, more contained, reflation environment could...

Hank Calenti, CFA

Bank Credit Weekly: Distractions May Drive Markets Near Term

Distractions could disturb fixed income markets over the next few weeks if misinterpreted or allowed to interrupt policy making. This could add a...

Hank Calenti, CFA

Bank Credit Weekly: Moving the Goal Posts

Fixed income goal posts were clearly moved by Democratic Party control of the Senate. Credit has limited upside in the current reflation scenario....

Hank Calenti, CFA

Bank Credit Weekly: Duration Desires Deliver Asia's AT1 & Sub Outperformance

Duration desires drove performance over the holiday shortened week. A US Senate leadership change could negatively impact the market as Goldilocks...

Hank Calenti, CFA

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

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

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)