Capital IdeasTM
Investment insights from Capital Group
Fixed Income
Etrit Vllasalija
Michael Habib
Franz Lathuillerie
Today, with the exception of the US regional banks, fundamentals across the banking sector are the strongest they have been in decades.
Despite this, high issuance volumes, ongoing concerns over the US regional banking crisis, and macroeconomic uncertainty means the sector trades wide of the broader corporate bond market. Does this represent an opportunity?
Banks are currently priced with a spread over investment grade credit
OAS comparison of Global Aggregate Corporate – Banking and Global Aggregate Corporate
Past results are not a guarantee of future results. OAS is option adjusted spread.
Source: Bloomberg. Data as at 31 December 2023
The market narrative has, in recent months, shifted towards an expectation that policy rates have now peaked and will soon fall as central banks achieve a soft landing. The banks are well placed for this scenario, with many having interest rate hedges in place to protect revenues.
Given the market often views banks as proxies for the macroeconomy, a reduction in recession risk should lead to renewed support for the sector.
Meanwhile, regulatory changes in light of the US regional banking crisis are likely to keep US bank issuance elevated in the next few years. In the longer term, however, the strengthening of banks’ capital positions as a result of these changes should be positive for bond holders. In the meantime, banks have a renewed focus on the quality and stickiness of their deposit base.
In this paper, Capital Group’s fixed income analysts outline what the changing macroeconomic environment might mean for the banks, the impact of the US regional bank crisis and the credit implications of regulatory changes, as well as the key opportunities and risks facing the sector.
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Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.