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.IShares Barclays USD Asia (SG:SG2D83975482) We expect some market volatility until more visibility is available. Following 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. 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. Market Outlook Risks may now be materially higher for EM credit. For more on this, please see Rizal Commercial Bank’s Inaugural AT1 Bond: Caveat Emptor. The pricing on higher rated BKIR’s bond further cements this view. We believe that Rizal’s bond was priced too tight however, we think that this issuance may benefit spreads on Rizal’s 2024 Senior Unsecured debt. BKIR has a long-established debt issuance programme and is much better at financial disclosure, in our view. Within the Additional Tier 1 (AT1) space, Bank of Ireland’s (BKIR) Euro-AT1 was issued +40 basis points wider than Rizal Commercial Bank’s (RCB PM) of last week, after adjusting for the currency and coupon basis. Close to Asia, Qatar-based Masraf Al Rayan also issued a five-year Sukuk at attractive price levels. In Asia, the Agricultural Bank of China (1288 HK) brought a Senior Unsecured bond which looks attractive relative to where similarly rated UBS and Bank of America brought 5.5-year and 10-year senior holding company bonds last month. In bank debt capital markets, over US$17 billion was issued in USD and Euros across the credit continuum.

Tactically, cross-over senior unsecured may be best for defensive positioning as volatility may be heightened until we have better visibility on the Fed’s plans. Concurrently, Turkish banks continued to lag financials globally as Fitch placed a negative outlook on its BB- sovereign rating. Bank of East Asia’s (23 HK) AT1 also outperformed, please see: Bank of East Asia: Strategic Review to Set AT1 Value Forewarned Is Forearmed. Investors may have expected a larger downgrade. State Bank of India’s (SBIN IN) Additional Tier 1 (AT1) bond outperformed despite being downgraded one-notch by Moody’s Investors Service to B2. In-line with increased risk tolerance in Asia, nine bond spreads tightened for every one that widened during the week as cross-over Senior Unsecured bonds outperformed other securities.

All eyes are now on to the Sept 16 FOMC meeting for greater details on how the Fed policy change is implemented. However, if longer-end Treasury yields continue to rise, then marginal flows into risk-assets may reduce, particularly in EM as rising Treasury yields pressure dollar FX levels. Curve steepening is generally associated with increased bank net interest income from maturity transformation and as sure as night follows day, a steepening yield curve resulted in higher bank share prices. The curve also steepened despite three record sized auctions during the week. If the Fed’s change in policy framework is actioned via yield curve control to cap real yields and push the dollar lower, then emerging market bonds will continue to benefit.Ĭoncurrently, in rate markets, the change in Fed policy stance and high supply expectations for September drove the US Treasury curve significantly higher as long-end bonds sold-off while shorter-end securities rose in price. However, how the Fed affects its policy change will make a difference to Asia and broader EM US$-denominated risk assets. The Powell put is alive and well in US high yield markets. Asia’s high yield market kept pace with the US as risk sentiment rose following the Fed Chairman’s speech this week.

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