Bank Credit Weekly: Narrative Change Pushes Carry-Trade Unwind as Treasuries Rally

Bank Credit Weekly: Momentum Slows as Conviction Is Lacking

US Investment Bank Results and Upcoming European Bank Earnings

Bank Credit Compass: Positive Total Return Sweet Spot

Bank Credit Weekly: Growth Concerns May Be Total Return Positive

Bank Credit Weekly: Employment Numbers Confirm a Hot US Economy

Gravity Works As WeWork Doesn't; Now Plan B

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

Asia High Yield Bond Index

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