Despite Commercial Real Estate Crisis... US Bank Bonds Continue Strong Demand

NYCB Stock Halves but "Limited Impact" Betting

Despite the recent banking sector soundness crisis triggered by the commercial real estate crisis in the United States, bond investors' love for bank bonds remains strong. Analysts believe that investors are betting that the impact of the New York Community Bancorp (NYCB) case, where the stock price halved last month due to highlighted commercial real estate risks, on the banking system will be limited.

On the 15th (local time), Bloomberg reported, citing its own data, that as of the 14th, the spread between the risk premiums of bank bonds and non-financial corporate bonds widened to 12bp (1bp = 0.01 percentage points), which is greater than before the NYCB incident. This is less than half the level seen during the bank run triggered by the Silicon Valley Bank (SVB) collapse early last year. Bank bonds and non-financial corporate bonds demand an additional 115bp and 127bp respectively over U.S. Treasury yields.

Corporate bonds generally offer higher yields compared to Treasuries, which are considered the safest. However, bank bonds have higher credit ratings than non-financial corporate bonds, resulting in lower risk premiums.

Typically, when banking sector crisis concerns spread, bank bond basis points rise, narrowing the gap between the two bond types. However, the fact that the gap is still widening indicates that bond investors are not overly worried about the recent NYCB incident's impact on the financial sector. Analysts led by Eric Beinstein of JP Morgan stated, "This is evidence of how strong the demand is for high-grade credit."

Expectations that the Fed may pivot away from aggressive monetary policy this year also contribute to the popularity of bank bonds. Last month, U.S. corporate bond issuance reached $188 billion, breaking the January record. According to Bloomberg, about $59 billion of corporate bonds have already been sold this month. Financial sector bonds accounted for 55% of investment-grade bonds. This reflects investors flocking to buy bonds at slightly higher yields before the benchmark interest rate cuts. Winnie Sisar, Global Head of Credit Strategy at CreditSights, analyzed, "Investors have realized that this may be the last chance to buy investment-grade bonds with an attractive 5.5% yield."

Given that U.S. Treasury yields recently rebounded above 4%, this momentum is expected to continue. With January inflation data not slowing as much as expected and the Fed delaying the timing of rate cuts, bond yields are rising, maintaining strong demand.

Statements from global financial experts aiming to quell the banking crisis triggered by NYCB also suggest that the bank bond boom will continue. On the 14th, Michael Barr, Vice Chair for Supervision at the Fed, emphasized at a conference hosted by the National Association for Business Economics (NABE), "Just because one bank (NYCB) underperforms expectations and increases provisions does not mean the entire banking system, which shows no signs of soundness or liquidity problems, will change." He added, "The banking system remains healthier and more resilient than last spring (during the regional bank failures)." Citigroup analyst Keith Horowitz recently noted in a memo that "NYCB is an exceptional case."

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