Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Approximately one-year ago, India-headquartered <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> began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in <a href="https://www.smartkarma.com/insights/india-bank-deposit-flight-risk-lessons-from-yes-bank" target="_blank" data-smartkarma-citation="insights:37617" rel="noopener">Deposit Flight Risk: Lessons from Yes Bank</a>, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

Approximately one-year ago, India-headquartered Yes Bank (YES IN) began to experience a silent run on its deposits. Several months later, this deposit run took the institution past the point of non-viability. To mark this inauspicious anniversary, we undertake a series of short insights to determine if the funding and liquidity lessons from Yes Bank are being applied at India-headquartered banks. Spoiler alert: they are not.As we noted in Deposit Flight Risk: Lessons from Yes Bank, India-headquartered bank funding franchises are more sensitive to potential deposit flight than displayed in their quarterly financial presentations. With an undue focus on the levels of current, savings and time deposits, the discussion neglects crucial factors which lead to a stable deposit franchise. At the same, undue reliance on Liquidity Coverage Ratios (LCRs) is not warranted.We inaugurate this Yes Bank Deposit Run Anniversary Series by assessing the level of stable deposits and deposit costs. We then compare these items at each US$-issuing bank to see if they are priced-in, from a credit perspective. In follow-up insights, we adjust the assumptions regarding likely deposit flight by type of deposit, incorporate deposits that are not captured in LCR reports and stress the reported LCRs for possible Covid-19 related payment delinquencies while assessing the credit-worthiness of India-headquartered banks.

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

We believe that it would be beneficial for <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank PCL (KBANK)</a> and <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank PCL (TMBTB)</a> to follow <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> Additional Tier 1 (AT1) bond with similar issuance and for <a href="https://www.smartkarma.com/entities/siam-commercial-bank-pub-co" target="_blank" data-smartkarma-citation="entities:214:1" rel="noopener">Siam Commercial Bank (SCBTB)</a> to issue a Tier II note over the near term. Capital constraints at Thailand-headquartered banks are not Common Equity Tier 1 driven and they vary from bank to bank, unlike most banks globally. This has implications for debt capital market issuance by these institutions and this issuance may positively impact on outstanding securities.  This unique banking system attribute leads us to believe that we will see more AT1 and Tier II bonds issued by these institutions over the near term. As this issuance occurs, currently outstanding notes should benefit. Higher debt capital buffers should also benefit equity investors. It would be better to take advantage of currently low rates rather than risk not having market access when needed.The issuance of an AT1 bond by Kasikornbank would likely have a positive impact on its currently outstanding US$-denominated Tier II note. The additional layer of subordination is of value. We note that KBANK is engaged in investors calls regarding a possible AT1 bond. Concurrently, the issuance of another AT1 bond by TMB Bank could positively impact on its currently outstanding AT1 note. We explain the alchemy of this in <a href="https://www.smartkarma.com/insights/bank-credit-strategy-pre-positioning-for-at1-price-accretion" target="_blank" data-smartkarma-citation="insights:42050" rel="noopener">Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion</a>.  Meanwhile, the 2029 maturity Senior Unsecured note of Siam Commercial may also be positively impacted by an increase in SCBTB’s Tier II layer.Thai banks face both a net profit and a capital buffer test towards determining their ability to make optional distribution payments, such as dividends, bonuses, and Additional Tier 1 coupons. The net profit test is relatively straightforward. Thai banks must report net profits as of the most recent year-end. The capital buffer test is less obvious and not highlighted by these banks in their presentations. Between the two, the net profit test is the more immediate constraint; however, the capital buffer test may determine near term debt capital needs. Certain Thai bank bonds look set for additional spread compression over the near term.

We believe that it would be beneficial for Kasikornbank PCL (KBANK) and TMB Bank PCL (TMBTB) to follow Bangkok Bank's (BBLTB) Additional Tier 1 (AT1) bond with similar issuance and for Siam Commercial Bank (SCBTB) to issue a Tier II note over the near term. Capital constraints at Thailand-headquartered banks are not Common Equity Tier 1 driven and they vary from bank to bank, unlike most banks globally. This has implications for debt capital market issuance by these institutions and this issuance may positively impact on outstanding securities.  This unique banking system attribute leads us to believe that we will see more AT1 and Tier II bonds issued by these institutions over the near term. As this issuance occurs, currently outstanding notes should benefit. Higher debt capital buffers should also benefit equity investors. It would be better to take advantage of currently low rates rather than risk not having market access when needed.The issuance of an AT1 bond by Kasikornbank would likely have a positive impact on its currently outstanding US$-denominated Tier II note. The additional layer of subordination is of value. We note that KBANK is engaged in investors calls regarding a possible AT1 bond. Concurrently, the issuance of another AT1 bond by TMB Bank could positively impact on its currently outstanding AT1 note. We explain the alchemy of this in Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion.  Meanwhile, the 2029 maturity Senior Unsecured note of Siam Commercial may also be positively impacted by an increase in SCBTB’s Tier II layer.Thai banks face both a net profit and a capital buffer test towards determining their ability to make optional distribution payments, such as dividends, bonuses, and Additional Tier 1 coupons. The net profit test is relatively straightforward. Thai banks must report net profits as of the most recent year-end. The capital buffer test is less obvious and not highlighted by these banks in their presentations. Between the two, the net profit test is the more immediate constraint; however, the capital buffer test may determine near term debt capital needs. Certain Thai bank bonds look set for additional spread compression over the near term.

Thai Bank Capital Constraints, Debt Capital Issuance Needs, and Potential Impacts

Asia and the US high yield markets tightened on improving economic indicators and increased hopes for a limited US stimulus package, respectively, as the week progressed. On Friday, a lower than expected US jobs report and volatility created by the news that US President Donald Trump had tested positive for Covid-19 capped gains from earlier in the week.In rate markets, the US Treasury curve steepened on reflation expectations and early week risk-on momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may consider a narrower stimulus bill was met with cautious optimism. We are not convinced that the failure to reach a stimulus agreement would be overly negative for risk assets in the near term, as expectations are for an agreement in the next few months.The Bloomberg index of emerging market capital inflows finished the week slightly higher. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.  Meanwhile, investors moved down the credit continuum in Asia-headquartered banks, in-line with increased risk sentiment. Investors rotated out of higher rated Tier II debt into lower rated high yield Senior Unsecured and more subordinated Additional Tier 1 (AT1) bonds.Concurrently, almost US$9 billion was raised by financial institution in USD and Euros in the form of Senior Unsecured, Tier II and AT1 bonds. This follows from over US$62 billion in bank bonds issued over the prior five weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis. In fact, examining the AT1 deals completed this week, we sense a whiff of panic by some AT1 issuers to lock-in current interest rate levels, even if disadvantageous relative to current – or past- coupon reset levels.  <a href="https://www.smartkarma.com/entities/julius-baer-group-ltd" target="_blank" data-smartkarma-citation="entities:22572:1" rel="noopener">Julius Baer (BAER VX)</a>, <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank (FAB UH)</a> and <a href="https://www.smartkarma.com/entities/svenska-handelsbanken-ab" target="_blank" data-smartkarma-citation="entities:22480:1" rel="noopener">Svenska Handelsbanken Ab (SHBA SS)</a> brought AT1 bonds at questionable levels, in our view.Concerns on China Evergrande Group’s debt load dampened new issuance in Asia. However, investors were treated to two high yield Green coupon opportunities this week. Finally, Bloomberg reports that Cerberus is marketing a “re-securitization” which has the appearance of a collateralized debt obligation (CDO). The reappearance of the CDO product, which performed poorly during the global financial crisis, suggests that we may be approaching a market peak.Market Outlook President Trump’s illness changes the US election landscape. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Asia and the US high yield markets tightened on improving economic indicators and increased hopes for a limited US stimulus package, respectively, as the week progressed. On Friday, a lower than expected US jobs report and volatility created by the news that US President Donald Trump had tested positive for Covid-19 capped gains from earlier in the week.In rate markets, the US Treasury curve steepened on reflation expectations and early week risk-on momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may consider a narrower stimulus bill was met with cautious optimism. We are not convinced that the failure to reach a stimulus agreement would be overly negative for risk assets in the near term, as expectations are for an agreement in the next few months.The Bloomberg index of emerging market capital inflows finished the week slightly higher. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.  Meanwhile, investors moved down the credit continuum in Asia-headquartered banks, in-line with increased risk sentiment. Investors rotated out of higher rated Tier II debt into lower rated high yield Senior Unsecured and more subordinated Additional Tier 1 (AT1) bonds.Concurrently, almost US$9 billion was raised by financial institution in USD and Euros in the form of Senior Unsecured, Tier II and AT1 bonds. This follows from over US$62 billion in bank bonds issued over the prior five weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis. In fact, examining the AT1 deals completed this week, we sense a whiff of panic by some AT1 issuers to lock-in current interest rate levels, even if disadvantageous relative to current – or past- coupon reset levels.  Julius Baer (BAER VX), First Abu Dhabi Bank (FAB UH) and Svenska Handelsbanken Ab (SHBA SS) brought AT1 bonds at questionable levels, in our view.Concerns on China Evergrande Group’s debt load dampened new issuance in Asia. However, investors were treated to two high yield Green coupon opportunities this week. Finally, Bloomberg reports that Cerberus is marketing a “re-securitization” which has the appearance of a collateralized debt obligation (CDO). The reappearance of the CDO product, which performed poorly during the global financial crisis, suggests that we may be approaching a market peak.Market Outlook President Trump’s illness changes the US election landscape. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. A sweep of the Senate, House and Presidency by the Democratic Party may be met with higher long-term interest rates on spending concerns. Although stimulus may be positive for US risk assets, higher long-term rates may not be emerging market friendly.Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk Sentiment Improves Despite Volatile News Flow

Dollar strengthening, continued equity market weakness and the panoply of Fed speakers crying for more fiscal stimulus did not help Asian or US HY credit sentiment. Against this backdrop, Asia’s HY index gapped wider on Friday while the US HY index steadily weakened throughout the week. Investors may see more attractive valuations following this secondary market selloff.In rate markets, the US Treasury curve flattened on supply technicals and risk-off momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may try to pass another stimulus bill was met incredulity that this could be accomplished while a Supreme Court nominee is vetted.The Bloomberg index of emerging market capital inflows finished the materially lower as the US dollar strengthened in a flight to safety trade. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.   Despite the softer tone in global risk sentiment, Asia bank credit was unchanged to slightly tighter in spread terms. Additional Tier 1 bonds outperformed other asset classes. This result is at odds with sentiment in other markets and we are not convinced that it is sustainable. Concurrently, despite a poor start to the week in bank debt capital markets, over US$8billion was issued by banks in USD and Euros in the form of Senior Unsecured and Tier II bonds. This follows from over US$54 billion in bank bonds issued over the prior four weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis.Amongst Asia-centric banks, <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd" target="_blank" data-smartkarma-citation="entities:714:1" rel="noopener">China Merchants Bank A (600036 CH)</a>, CDB Leasing and <a href="https://www.smartkarma.com/entities/china-huarong-asset-management" target="_blank" data-smartkarma-citation="entities:968:1" rel="noopener">China Huarong Asset Management (2799 HK)</a> brought US$ bonds during the week. Meanwhile three banks and two countries announced mandates for new debt issuance in the near term. Over upcoming week, the pace of supply likely to slow in Asia because of China’s Golden Week holiday starting Oct. 1. At the same time, spreads in Asia are unlikely to move with conviction until this festival is over. Notably, <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> issued a new note at a similar structure and risk layer as was issued by <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> last week; however, BNP’s bond was issued 10 basis points (bps) tighter while HSBC’s bond widened 27bps during the week.  Market Outlook Aggregate demand remains structurally weak. This realization is offsetting the unrealistically high optimism which followed from the Fed’s change in inflation policy stance. We may now have a period of Fed optimism unwinding combined with heightened concerns on the economic outlook post-US election. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. This weeks’ confluence of risk-off indicators is a reminder that investors flee to the US dollar in times of heightened uncertainty, to the detriment of EM assets.  Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Dollar strengthening, continued equity market weakness and the panoply of Fed speakers crying for more fiscal stimulus did not help Asian or US HY credit sentiment. Against this backdrop, Asia’s HY index gapped wider on Friday while the US HY index steadily weakened throughout the week. Investors may see more attractive valuations following this secondary market selloff.In rate markets, the US Treasury curve flattened on supply technicals and risk-off momentum. The volatility of the reflation trade, on one week and off the next, along with rangebound oil prices, suggests that investor’s economic demand expectations are in flux. Reports that US legislators may try to pass another stimulus bill was met incredulity that this could be accomplished while a Supreme Court nominee is vetted.The Bloomberg index of emerging market capital inflows finished the materially lower as the US dollar strengthened in a flight to safety trade. We anticipate that this index could be a bit whippy over the next few weeks as the potential for the most contentious US election in history drives flows back to the US dollar.   Despite the softer tone in global risk sentiment, Asia bank credit was unchanged to slightly tighter in spread terms. Additional Tier 1 bonds outperformed other asset classes. This result is at odds with sentiment in other markets and we are not convinced that it is sustainable. Concurrently, despite a poor start to the week in bank debt capital markets, over US$8billion was issued by banks in USD and Euros in the form of Senior Unsecured and Tier II bonds. This follows from over US$54 billion in bank bonds issued over the prior four weeks. The recent funding frenzy suggests that issuers are aware that the currently optimal issuance landscape will not last forever. With credit spreads unlikely to tighten much further, next years’ debt issuance may be considerably more expensive on a relative basis.Amongst Asia-centric banks, China Merchants Bank A (600036 CH), CDB Leasing and China Huarong Asset Management (2799 HK) brought US$ bonds during the week. Meanwhile three banks and two countries announced mandates for new debt issuance in the near term. Over upcoming week, the pace of supply likely to slow in Asia because of China’s Golden Week holiday starting Oct. 1. At the same time, spreads in Asia are unlikely to move with conviction until this festival is over. Notably, BNP Paribas' (BNP FP) issued a new note at a similar structure and risk layer as was issued by HSBC Holdings (HSBA LN) last week; however, BNP’s bond was issued 10 basis points (bps) tighter while HSBC’s bond widened 27bps during the week.  Market Outlook Aggregate demand remains structurally weak. This realization is offsetting the unrealistically high optimism which followed from the Fed’s change in inflation policy stance. We may now have a period of Fed optimism unwinding combined with heightened concerns on the economic outlook post-US election. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. This weeks’ confluence of risk-off indicators is a reminder that investors flee to the US dollar in times of heightened uncertainty, to the detriment of EM assets.  Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Return of Risk-Off, Save for Asia Bank Credit

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. <a href="https://www.smartkarma.com/entities/bank-of-china-ltd" target="_blank" data-smartkarma-citation="entities:24574:1" rel="noopener">Bank Of China (BCHINA)</a>AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC's (H) (1398 HK)</a> new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> new issue bond will tighten by at least 10bps relatively quickly. Please see <a href="https://www.smartkarma.com/insights/bangkok-bank-s-new-at1-overweight-on-relative-value" target="_blank" data-smartkarma-citation="insights:43402" rel="noopener">Bangkok Bank’s New AT1 – Overweight on Relative Value</a> for our views on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

The lack of shock and awe from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income markets, albeit without strong conviction. Supply, the US election and vaccine progress are back to the forefront of risk sentiment drivers over the near term while the degree of additional monetary policy stimulus that can be affected remains open to debate. Against this backdrop, Asia and the US high yield markets tightened by similar amounts.   
In rate markets, US Treasury curve steepening returned after two weeks of clear flattening following the Fed Chairman’s Jackson Hole speech. Curve steepening is generally associated with increased bank net interest income from maturity transformation. The return of the reflation trade, along with slightly higher oil prices, suggests that investor’s economic demand expectations rose slightly during the week, despite the lackluster FOMC result. Next week’s record supply of 2-year, 5-year and 7-year Treasury notes should weigh on the rates market, particularly with Japan on holiday on Monday and Tuesday. 
At the shorter end of the interest rate curve, Eurodollar futures rates ticked-up in the +4-year area to suggest one interest rate increase in 2024 and another in 2025. This is hardly consistent with a meaningful attempt to overshoot a 2% inflation target and begs the question of how the Fed can achieve this target with its current policy toolkit. It appears as if lower-for-longer is a five- to seven-year look forward.   
In-line with steepening of the US Treasury yield curve and a return of risk sentiment in Asia, ten bond spreads tightened for every one that widened during the week. The tightening to widening ratio was more than three times the prior week. Almost every bond in our +100-universe tightened. Bank of China’s 2025 callable AT1 bond outperformed all others, tightening by 17bps. Bank Of China (BCHINA)AT1 bond has become somewhat of a bellwether of Asia bank risk sentiment over the last few weeks.
In bank debt capital markets, over US$15 billion of securities were issued as banks continued to take advantage of low rates and sustained demand. Amongst Asia-centric banks, Bangkok Bank, Bank of China, HSBC Holdings, ICBC and Sumitomo Mitsui Financial Group brought US$ bonds during the week. We expect ICBC's (H) (1398 HK) new AT1 note to trade in-line with BCHINA’s AT1 over the near term. HSBC’s new note came at a meaningful 20bps new issue concession relative to its holding company Senior Unsecured curve. We suspect that HSBC Holdings' (HSBA LN) new issue bond will tighten by at least 10bps relatively quickly. Please see Bangkok Bank’s New AT1 – Overweight on Relative Value for our views on this debt issuer and its new security.
Market Outlook The current issue is that Fed policy is now more unpredictable, absent greater guidance on how its new longer-run strategy will influence near-term policy decisions. This past week’s FOMC meeting disappointed by not adding depth to the monetary policy canvas. As such, risks may now be materially higher for EM credit. Until now, perceptions were that lower-for-longer interest rates would cause US$-investors to reach for yield, in turn raising demand for longer maturities and non-US assets. Following Fed Chairman Powell’s speech, if the Fed permits long bond yields to rise, then marginal flows into emerging market credit may slow on increasing dollar strength.
Inside: In this weekly, we elaborate on these themes as we review global credit index levels, interest rates, Eurodollar futures and fund flows as well as bank bond spread moves and recent debt issuance to identify possible investment opportunities and potential pitfalls in Asia-headquartered bank bonds.

Bank Credit Weekly: Risk Sentiment Returns as Markets Ignore FOMC Disappointment

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)

India-Headquartered Banks: Stable Deposits and Costs 1-Year After the Yes Bank Silent Run

Approximately one-year ago, India-headquartered Yes Bank began to experience a silent run on its deposits. To mark this inauspicious anniversary,...

Hank Calenti, CFA

Thai Bank Capital Constraints, Debt Capital Issuance Needs, and Potential Impacts

Capital constraints at Thailand-headquartered banks are not Common Equity Tier 1 driven and they vary from bank to bank, unlike most banks...

Hank Calenti, CFA

Bank Credit Weekly: Risk Sentiment Improves Despite Volatile News Flow

: Asia and the US high yield markets tightened on improving economic indicators and increased hopes for a limited US stimulus package,...

Hank Calenti, CFA

Bank Credit Weekly: Return of Risk-Off, Save for Asia Bank Credit

Dollar strengthening, continued equity market weakness and the panoply of Fed speakers crying for more fiscal stimulus did not help Asian or US HY...

Hank Calenti, CFA

Bank Credit Weekly: Risk Sentiment Returns as Markets Ignore FOMC Disappointment

The lack of shock and awe outcome from this week’s FOMC meeting did not derail market sentiment as risk tolerance returned to the fixed income...

Hank Calenti, CFA

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