Archive

Monthly Archives: March 2019

18th March 2019

Credit making hay while the sun shines

MARKET CLOSE:
iTraxx Main

59.5bp, -0.5bp

iTraxx X-Over

268.3bp, -0.2bp

🇩🇪 10 Yr Bund

0.08%, -1bp

iBoxx Corp IG

B+138.9bp, -2bp

iBoxx Corp HY

B+433.7bp, -3bp

🇺🇸 10 Yr US T-Bond

2.59%, unchanged

🇬🇧 FTSE 100

7382.01, (-0.58%)
🇩🇪 DAX

13681.19, (-0.75%)
🇺🇸 S&P 500

3370.29, (-0.39%)

Credit sees off any Brexit uncertainty…

We had a potentially massive few days ahead of us, but the third meaningful Brexit vote is looking increasingly unlikely that it is going ahead – and it was the most important event, in our view. The EU Council meetings on 21/22 March now comes into play in its significance as we look for any movement from the EU.

Alas, nothing there to shake the credit market. Abertis came in a 4-part deal and Telstra joined them in the IG non-financial sector. SpareBank 1, SocGen and Bankia all visited the senior non-preferred market to round out a busy day in euro-credit primary. Equities played out flat in the day, rates were mixed to better bid, sterling lost a bit of its lustre and credit spreads were tighter in a market better bid for choice. That the overall markets played out as they did was probably as much to do with the growth slowdown (Fed meeting this week) as the issues around Brexit.

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17th March 2019

Will the German Mega Zombie Bank (GMZB) take off? | Bank Capital Insights

So, it is official – Two zombies may join up to form a mega bank

Earlier this Sunday, both DB and Commerzbank officially confirmed that they are in exploratory talks about a potential merger.  It looks like the German government is happy to see the two banks combine and create a German national champion bank.  It will take a while before the exact merger details are known assuming the talks culminate in a deal.

To some extent, it reflects the painful realisation that the turnaround efforts at the individual banks have not been successful and the German government sees the merger as a possible way to generate growth and earnings (or shall we say end the misery).

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17th March 2019

Half time – and it’s game on

MARKET CLOSE:
iTraxx Main

60bp, unchanged

iTraxx X-Over

268.5bp, -1bp

🇩🇪 10 Yr Bund

0.08%, -1bp

iBoxx Corp IG

B+140.7bp, -1.5bp

iBoxx Corp HY

B+436.6bp, -3.3bp

🇺🇸 10 Yr US T-Bond

2.60%, -3bp

🇬🇧 FTSE 100

7382.01, (-0.58%)
🇩🇪 DAX

13681.19, (-0.75%)
🇺🇸 S&P 500

3370.29, (-0.39%)

Credit parties like it’s…

We’re at the halfway stage for the month and just a couple of weeks away from the corporate bond market seeing out the first quarter – and in fine form. Unbelievable as it might be, we need a double-take at the performance it has delivered for investors, who had been very apprehensive going into the new year.

Worry not. Deals have gushed as the sluice gates have opened, buoyed by a lower rate regime coming on the back of what looks to be a protracted economic slowdown. The ECB and other central bank policies will need to remain accommodative for longer – with additional measure likely – as they push on that string and try to contain/prevent macro-event cliff risk. That vulnerability in the economy suggests that we’re going to see much of credit in 2019 (if not all) play out like 2016/17.

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13th March 2019

Wary markets

MARKET CLOSE:
iTraxx Main

59.5bp, -1.3bp

iTraxx X-Over

271bp, -7bp

🇩🇪 10 Yr Bund

0.07%, +1bp

iBoxx Corp IG

B+144.8bp, -1.5bp

iBoxx Corp HY

B+xxxbp, -+xbp

🇺🇸 10 Yr US T-Bond

2.62%, +1bp

🇬🇧 FTSE 100

7382.01, (-0.58%)
🇩🇪 DAX

13681.19, (-0.75%)
🇺🇸 S&P 500

3370.29, (-0.39%)

It ain’t over just yet…

This Brexit jig is anything but over. The EU should cut the legs off from under it and refuse an Article 50 extension because if we get no deal and no Brexit – it will only be ‘for now’. There will be immense pressure for the UK to go for it all again once the political elite has dusted itself down, and it will thus be an albatross around the EU’s neck until they cede to the will of the UK people.

It was not quite the euphoric response in the markets which we might have expected. After all, the odds are now firmly in favour of taking ‘no deal’ off the table, extending Article 50 and then drifting into there being no Brexit. After all, we have certainty now, don’t we? The market should be rallying!

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12th March 2019

May’s mess

MARKET CLOSE:
iTraxx Main

60.8bp, -1.7bp

iTraxx X-Over

278bp, -6bp

🇩🇪 10 Yr Bund

0.05%, -1bp

iBoxx Corp IG

B+146.5bp, -1.75bp

iBoxx Corp HY

B+451.5bp, -7bp

🇺🇸 10 Yr US T-Bond

2.60%, -4bp

🇬🇧 FTSE 100

7382.01, (-0.58%)
🇩🇪 DAX

13681.19, (-0.75%)
🇺🇸 S&P 500

3370.29, (-0.39%)

Hold your nerve…

Well, that was what we would call a volatile session. It impacted FX, rates and equity markets with credit alone in the ascendancy. The greatest levels of volatility were in FX markets. We think that Unicredit played it smart with an AT1 print, on the screens just as the markets opened with a positive take on the Brexit proceedings. It didn’t last.

Offering an initial couple of 8% (obviously, final pricing was lower), the Italian banking giant managed to attract a massive order book. However, the early interpretation of the new Brexit legal agreement didn’t cut the mustard in that it failed to assuage the fears of Brexiteers fearful of being locked-in to the back stop in perpetuity. Rates managed to get some support, sterling lost all its earlier gains and some more, equities weakened while credit was never going to buck the trend, and ended a touch better offered for choice.

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11th March 2019

Uncle Sam to the rescue

MARKET CLOSE:
iTraxx Main

62.5bp, -2.1bp

iTraxx X-Over

284bp, -6bp

🇩🇪 10 Yr Bund

0.07%, unchanged

iBoxx Corp IG

B+148.25bp, -0.5bp

iBoxx Corp HY

B+458.5bp, -1bp

🇺🇸 10 Yr US T-Bond

2.65%, +2bp

🇬🇧 FTSE 100

7382.01, (-0.58%)
🇩🇪 DAX

13681.19, (-0.75%)
🇺🇸 S&P 500

3370.29, (-0.39%)

Calm amid stormier waters…

The reverberations from last week’s slashing of growth and inflation Eurozone forecasts for 2019 by the ECB are still being felt. Equities had a bad couple of days and, admittedly, we saw a smart bounce in this week’s opening session, but it all feels tentative. It won’t take much for the benchmark 10-year Bund yield to see 0% (0.07% currently). If there has been a clear winner – rather an outperformer – in the risk asset space, then it has been the credit market.

Returns are up because of the bid for the underlying, while spreads have only eased wider. Nevertheless, the corporate bond market hasn’t gone unscathed because the volatility and weakness seen in equities has eroded some confidence and put a stop to the aggressive pace of issuance seen in the period leading up to that press conference last week.

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8th March 2019

ECB’s Third Let’s Try Risk On (TLTRO 3) | Free Content

Post-ECB Meeting

I had set out my Bank Capital Outlook at the beginning of the year (2nd January 2019) wherein I saw significant scope for generating substantial returns (10%+) based on single name selection and evaluation of macro factors.  And as of now, this strategy has returned 6% YTD.

Now, following yesterday’s ECB meeting wherein additional accommodation was announced, subtle changes to the investing strategy are required.

ECB keep on accommodating again and again

ECB’s TLTRO 3 will undoubtedly help the EZ banking system with more liquidity and funding options and will help the weaker banks to roll over existing debt – and also help credit creation in the process. Overall, the probability of default should decrease further as banks fund through the ECB.


Equities look slightly vulnerable

Without economic growth, most of the existing NPL stock is unlikely to go away and, in fact, may lead to further NPL creation.  In any case, earnings are likely to be impacted due to margin compression and given the high cost base, little room for additional loan loss provisions.  And if banks were to take additional litigation/settlement and restructuring costs, earnings are likely to come under pressure.

Return on Equity is already low for many of the banks, and may yet go lower.  Given the 10%+ COE for most EZ banks, the case for investing in EZ bank equities is just not there.  To me, there is plenty of downside in EZ bank equities.

Whilst the ECB may have solved the liquidity issue, it has not taken away the potential Solvency issue (in case of a deep recession and/or other tail risks) and consequent recapitalisation for some banks and this new TLTRO does not address that.  I believe that there is still plenty of downside in EZ bank equities.


AT1 is attractive but needs careful selection

Most of the AT1 issued by large cap EZ banks do look attractive. However, one needs to take into account the potential extension risk and especially those AT1s with low reset spreads.

Is AT1 attractive to own?

Once the right issuer has been identified, then AT1s issued by that bank would be attractive to own if:

  • AT1 yield is double the bank’s dividend yield
  • No more issuance to meet regulatory capital thresholds
  • Significant headroom on both coupon paying ability test and conversion trigger test
  • Bank’s equity is trading at or above 0.6 P/TNAV

And if rates keep rallying, the chances of non-call actually increase as banks may be incentivised to keep the existing AT1s instead of tapping the markets for replacement.

So, I think the longer call AT1s may be better to own ahead of short-dated calls.  Also, it is better to own the national champion peripheral bank AT1s given the additional yield and hedge them with single name equity puts.


NPS the sweet spot

My personal view is that the Non-Preferred Senior / Holdco Senior issued by the large EZ banks look very attractive on a risk-adjusted basis (taking into account probability of default and loss given default).  The spread differential between NPS and LT2 of the same issuer seems to be excessive. The only issue seems to be the potential large supply of NPS debt, but I think that it has been overplayed.

CDS land..

And in CDS land, I think Senior Fin Index is wide relative to Main and I see Senior Fin trading through Main over the course of the year.  And within Single names, Senior CDS of peripheral EZ banks look wide relative to Core EZ banks and expect further compression.


Conclusion

2019 will continue to be a very interesting year for bank capital with loads of opportunities and significant volatility. But there is significant scope for generating substantial returns based on single name selection and dynamic portfolio risk management.

7th March 2019

Thanking you, Mr Draghi

MARKET CLOSE:
iTraxx Main

63.1bp, +1.8bp

iTraxx X-Over

285.8bp, +8bp

🇩🇪 10 Yr Bund

0.07%, -6bp

iBoxx Corp IG

B+147.1bp, +1bp

iBoxx Corp HY

B+455bp, +8bp

🇺🇸 10 Yr US T-Bond

2.65%, -5bp

🇬🇧 FTSE 100

7382.01, (-0.58%)
🇩🇪 DAX

13681.19, (-0.75%)
🇺🇸 S&P 500

3370.29, (-0.39%)

Can’t blame it on the Brexit…

The Eurozone is still in crisis. Just as we suggested previously, the ECB came out with additional policy accommodation. Although rates were left unchanged – we think moving on them is politically more difficult – the potential rise in interest rates was pushed back to 2020, and the central bank unveiled a new series of long term refinancing operations (TLTROs). Basically, cheap loans for the Eurozone’s banks in an effort to help support growth.

None of that ought to have come as a surprise, given that the macro outlook has been looking particularly bleak for a while now. The region’s economy has barely hauled itself out from the previous downturn and is again plunged into another. And the growth downgrade for 2019 was nothing short of brutal.

The markets reacted as we had previously suggested that they might. The low rates for longer mantra means… eventually equities will gain some support, we will get lower bond yields immediately and amid tightening in corporate bond spreads – so long as macro cliff-risk is avoided.

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7th March 2019

When the DOVE turned even more DOVISH | Bank Capital Insights

Carry on “TLTRO”…

In a slightly unexpected move, the ECB pushed out the timing of its first hike until the beginning of 2020 at the earliest and offered banks a new round of TLTRO loans to help revive the euro zone economy.  In the process, the ECB further lowered the growth and inflation forecasts for 2019 and 2020.  It certainly seems that the ECB is unlikely to be able to hike interest rates any time soon.  Nor will it be able to stop providing cheap loans to the EZ banking system.

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6th March 2019

Go with the flow

MARKET CLOSE:
iTraxx Main

61.3bp, +0.5bp

iTraxx X-Over

277.8bp, +2.8bp

🇩🇪 10 Yr Bund

0.12%, -5bp

iBoxx Corp IG

B+146.1bp, +1.6bp

iBoxx Corp HY

B+447bp, +7bp

🇺🇸 10 Yr US T-Bond

2.69%, -3bp

🇬🇧 FTSE 100

7382.01, (-0.58%)
🇩🇪 DAX

13681.19, (-0.75%)
🇺🇸 S&P 500

3370.29, (-0.39%)

The crystal ball says…

The deals keep coming but there was a kind of lull in the market nevertheless. We’re pre-ECB and it’s likely going to be all guns blazing thereafter. Surely Draghi will present a more dovish policy stance amid continued (and increasing) weakness across the Eurozone, even if some have pointed to the last data print as suggesting that we’ve reached the bottom. We haven’t.

Bunds ought to get a better bid behind them (again), equities should rally and add to the super gains already in the bag for this year as the euro currency stays weak. Credit spreads ought to rally some more and add to the 28bp of (iBoxx index) tightening that has already exceeded all expectations this year. Alas, returns are going rise and we’re going to see out a solid opening quarter for 2019. Here’s hoping!

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