Banks are likely to cut post-earnings bond sales as costs rise

THE quarterly bank-bond boom is set to be a tamer affair this earnings season, with costs rising and the market's biggest borrowers already ahead of their financing schedules.

"Issuance will underwhelm post-earnings results," JPMorgan Chase & Co credit analysts Kabir Caprihan and Nikita Dyatlov wrote in a note dated Jul 6. The earnings season kicked off Thursday (Jul 14) on a sour note, with JPMorgan temporarily suspending share buybacks after disappointing results and Morgan Stanley reporting revenue from investment banking plummeted as capital markets seized up.

The analysts forecast that the biggest banks will sell between US$14 billion and US$16 billion of bonds this month, well below the about US$19 billion that makes July the fourth-highest month for debt sales from Wall Street stalwarts. Bank bond sales in both May and June trailed historical averages at a time when spreads were tighter, "possibly indicating limited supply needs", wrote the analysts.

And spreads continue to widen following Thursday's earnings reports, increasing costs for prospective borrowers. JPMorgan's 4.586 per cent bond maturing in 2033 widened 6 basis points to 188 as of 11.43 am in New York, according to Trace bond trading data. Meanwhile, Morgan Stanley's 5.297 per cent bonds due in 2037 widened by 8 basis points to 280 basis points.

The average spread on a financial institution bond was at 1.56 per cent as of Wednesday, after widening to the highest level since June 2020 at the start of the month, according to Bloomberg index data. Spreads on the broader high-grade bond index are lower at 1.51 per cent as the Federal Reserve raises interest rates to try to tame the fastest inflation since the 1980s.

"Spread not yield matters for banks," the JPMorgan report said. "They have tended to be more opportunistic than programmatic this year."

Financial companies front-loaded their borrowing needs as the Fed shifted monetary policy to tighten liquidity and raise overnight lending rates 3 times already this year, with more increases on the horizon. The finance sector has sold more than US$394 billion of bonds in 2022, representing about 53 per cent of investment-grade volume, according to data compiled by Bloomberg News.

The biggest US banks traditionally issue bonds soon after reporting their results, particularly if the yield curve presents an opportunity for lowered borrowing costs. A spike in yields over the past 3 months make that less likely.

"It's hard to bet against these banks coming to the debt market after earnings but they've got a lot of what they wanted to do done already," Bloomberg Intelligence credit analyst Arnold Kakuda said in an interview. "So that will help bring down the pace of issuance for the second half."

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Citigroup may be finished with bond sales for the year, considering the lender raised US$20 billion in the first half, reaching the high end of its annual supply, Kakuda wrote in a note on Monday. And JPMorgan may slow its pace of offerings in the second half, he said.

To be sure, some of the big banks likely will sell debt soon after earnings. Morgan Stanley and Bank of America, who raised US$8.5 billion and US$7.75 billion respectively after reporting earnings in July 2021, have room to bring new deals this month, the JPMorgan analysts said.

Goldman Sachs Group, which borrowed US$5.5 billion at this time last year, also may sell bonds, they added. Kakuda anticipates Wells Fargo may be active in the second half as it has the most extra capital and the capacity to do share buybacks.

The size and schedule of bank borrowing may depend on what the lenders have to say about their profitability. While the Fed's rate hikes are expected to provide a boost to net interest income, a key source of revenue for the biggest banks, the 2 earnings reports on Thursday show the challenges banks face amid volatile markets and a slowing economy.

A US$27.8 billion haul in trading revenue, according to analyst estimates compiled by Bloomberg, should help earnings, countering a hit from slowdowns in investment-banking and mortgage businesses and a drop in valuations at their wealth-management arms.

And investor demand to take on more debt will help determine banks' capital-raising plans. Investors have yanked cash from US high-grade bond funds for 15 straight weeks, extending the longest losing streak on record. The bonds also suffered their worst first-half on record, underperforming every other major category of debt in the US.

Elsewhere in credit markets:

Americas

In hindsight, maybe it wasn't a good idea to lend hundreds of millions of dollars at rock-bottom interest rates to a money-losing used-car seller, a payday lender, or a hospital chain in the middle of a pandemic. Now with the economic outlook dimming, some of those newly minted notes are trading like distressed debt.

• PepsiCo is braving hostile market conditions to sell new investment-grade debt Thursday in as many as 3 tranches, including a rare green offering and a regular 30-year security
• Corrections industry health-care company Wellpath Holdings is facing pressure on earnings and cash flows as its wage and pharmacy expenses rise

EMEA

Online fashion retailer BestSecret is holding investor calls on Thursday ahead of a potential high yield-rated issue that would refinance an older bond coming due next year.

• Should that deal not materialise on Thursday, it would mark the first zero-issuance day in Europe since Jun 24
• Italian bank bonds and credit-default swaps are among the worst performers in Europe's credit market as Prime Minister Mario Draghi's government is at risk of collapse
• The euro area's economic recovery from the coronavirus pandemic is set to be softer than previously anticipated and inflation is poised to be higher, based on new forecasts by the European Commission

Asia

The outlook for Asian junk dollar bonds turned bleaker after a hot US inflation print boosted the prospects of even higher borrowing costs and a recessionary economy that will spur more defaults.

• China's credit market is moving into a fresh phase of distress, as stronger developers are being engulfed in a bond selloff that started with China Evergrande last year
• Country Garden's dollar and local-currency bonds climbed Thursday, paring some of this week's slump after one unit said it intends to buy as much as 1 billion yuan (S$207 million) of another unit's local notes in the secondary market
• A rapidly increasing number of disgruntled Chinese homebuyers are refusing to pay mortgages for unfinished construction projects, exacerbating the country's real-estate woes and stoking fears the crisis will spread to the wider financial system
• Asia's primary dollar bond market was quiet on Thursday as the US Treasury curve shows a deepening risk of recession
• Singapore's central bank unexpectedly tightened monetary policy on Thursday, its second surprise move this year, as rising inflation fanned the risk of economic contraction
• The upturn in Indian economic activity as pandemic restrictions are pulled back is leading to more private Indian companies accessing the rupee bond market BLOOMBERG