Banks

With the Federal Reserve (Fed) set to begin its long-awaited interest rate easing cycle at next week’s Federal Open Market Committee (FOMC) meeting, Wednesday’s Consumer Price Index (CPI) inflation report for August was the last big economic release investors could comb for clues as to the size of the first cut.

Earlier this week the Australian Prudential Regulation Authority (APRA) proposed scrapping Additional Tier 1 (AT1) instruments and not replacing them with any other form of junior debt, with the consultation paper suggesting that instead Australian banks could fill their 1.50% AT1 allowance with a combination of Tier 2 (1.25%) and Common Equity Tier 1 (CET1) capital (0.25%).

Any market participants hoping for a quiet few days to ease back into “work mode” after the summer break have had to rapidly adjust their expectations.

When the Bank of England (BoE) cut interest rates for the first time in four years earlier this month, we thought the move – made on a knife-edge 5-4 vote – had come a little too early.

Market attention in the government bond market has rapidly turned from central banks holding rates “higher for longer” to the potential for “lower and sooner".

Julius Baer announced a call of its $300m Additional Tier 1 (AT1) instrument. The bond had a coupon of 4.75%, and if not called it would switch to a new coupon of five-year Treasury yield plus 284 basis points (bps), so about 6.7% at the moment.

We are coming towards the end of the reporting cycle for European banks for the first half of 2024. Unlike other quarterly reports, mid-year results are particularly useful in our view. They confirm the trends that we have already seen in the first half of the year, and thus validate or indeed put into question, the outlook that the management teams laid out for the full fiscal year.

If you were on vacation last week, your holiday blues wouldn’t have been helped when you looked at your screens this morning, given how quickly sentiment has changed, mainly on the back of one data point.

Last week, the Bank of England (BoE) published a speech by its Executive Director for Markets, Victoria Saporta, in which she laid out the central bank’s evolving role as a lender to the UK banking system. More specifically, the speech highlighted how the BoE expects to see UK banks having a greater reliance on its funding facilities going forward.

A consumer loan ABS issued last week by Consors Finanz, a fully-owned subsidiary of BNP Personal Finance, highlights the remarkable appetite investors are currently showing for mezzanine ABS bonds.

There is little disagreement among investors and economists that the last few years have been highly unusual in many respects. An inflationary shock in developed markets, one of the fastest rate hiking cycles on record, the worst year in decades for government bonds (2022), and mild recessions with no movement in unemployment are just a few of the dynamics that have strayed from recent norms.

For any fixed income investors that follow the England football team, the plan for H2 2024 may feel somewhat familiar – no substitutions in the second half.