Just last week, bank bonds were hot property for credit investors. But the collapse of Silicon Valley Bank changed everything, and buyers remain wary despite Tuesday’s bounce in financial sector assets.
(Bloomberg) — Just last week, bank bonds were hot property for credit investors. But the collapse of Silicon Valley Bank changed everything, and buyers remain wary despite Tuesday’s bounce in financial sector assets.
“We’re not ready to dive in just yet — particularly after the rally today — but there’s going to be more opportunities,” Steven Boothe, portfolio manager and head of global investment-grade fixed income at T. Rowe Price Group Inc., said in a phone interview Tuesday. Competition for deposits exacerbates liquidity concerns, which may create solvency issues for some banks, according to Boothe, who helps oversee $1.31 trillion in assets globally.
The riskiest type of debt issued by European lenders slumped to a negative year-to-date return, flipping the script on what had been a no-brainer trade just days ago. News of “material weaknesses” in financial reporting by Credit Suisse Group AG increased the anxiety, pushing the cost to insure bonds of the troubled Swiss lender against default to a record high.
“When you have this type of risk, bulls pull their horns in, become more defensive and don’t spend as much,” said Brian Kloss, a portfolio manager at Brandywine Global, in an interview. “This is more a timing issue than having a specific catalyst that triggers a rebound,” and investors will wait it out to see if moves made by US regulators to support financial institutions will work, he said.
European senior and subordinated bank bonds widened more than the broader euro investment-grade market on Tuesday, while contingent convertible bonds — the riskiest type of bank debt in Europe — fell. A multicurrency index of the asset class now has a negative 0.6% return for the year in dollar terms — after being up almost 2% just last Thursday as investors bet on short-duration amid rising rates.
In the US, bonds of SVB Financial Group, First Republic Bank and M&T rallied Tuesday as concerns about wider contagion eased. But Moody’s Investors Service cut its outlook on the US banking system to negative from stable, citing a run on deposits that led to three lenders collapsing in less than a week.
Federal Reserve tightening will hurt banks already being tested by a slowdown in dealmaking and lending, as well as a tough housing market, according to Michael Contopoulos, director of fixed income at Richard Bernstein Advisors.
“There will likely be some widening pressure over the next six to nine months,” said Contopoulos in a phone interview Tuesday. He added that shorter-dated debt from systemically-important banks looks “very attractive” at current levels.
‘Hidden Losses’
Analysts note that SVB’s issues were idiosyncratic, because of its client base in the technology and venture capital space, and its big bet on long-dated US Treasuries.
But the hit to market sentiment may have knock-on effects for the sector and for the wider economy, especially if the turmoil leads to stricter lending standards. Economists are concerned that stressed financial markets, with banks tapping investors for regulatory capital and regular funding, will mean lenders become more selective.
“The biggest risk is that depositors in Europe also start to flee weaker banks, which is also then a problem for European banks,” said Kyle Kloc, a portfolio manager at Swiss fund Fisch Asset Management.
UniCredit SpA economists led by Tullia Bucco agree that the bank bond selloff could have further to run.
“We expect this instability to continue as the situation is difficult to analyze and European banks are also subject to hidden losses in their securities bond portfolios,” they wrote in a note.
(Updates throughout.)
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