ADVERTISEMENT

Bond ‘Armageddon’ Pummels Global Banks as Recession Panic Swirls

Bond ‘Armageddon’ Pummels Global Banks as Recession Panic Swirls

(Bloomberg) -- Right on cue, bonds are lashing the usual suspects in the equity market as global yield curves flash fresh economic warnings.

A total-return index of bank stocks in developed markets plunged near a record low versus the wider benchmark, as the gap between two- and 10-year yields slid into negative territory across the U.S. and the U.K.

Blame worrisome economic data from China and Germany that’s overshadowing an apparent thawing in the U.S.-China trade war.

Bond ‘Armageddon’ Pummels Global Banks as Recession Panic Swirls

The forward price-to-book ratio for the MSCI World Banks Index has dropped to December levels, and is now the lowest since 2016 compared with the broader market. Citigroup Inc. plunged as much as 4.2%, Bank of America Corp. 3.6% and JPMorgan Chase & Co. 3.3%.

Flat and inverted yield curves are famously a bane for the sector. They’re a sign a downturn may be brewing, undercutting credit demand for consumption and investment. Recent bond gyrations also threaten the economics of financing long-term loans with short-term funds.

Despite bright spots in credit-growth data, the fear is that banks may tighten lending to ignite a vicious economic cycle.

“Bond yields are pricing in Armageddon,” said Roelof Salomons, chief strategist at Kempen Capital Management NV. “The concern is that lower rates will keep economies and corporates afloat but such policy hurts banks’ profitability.”

Read more: BofA leads banks lower as key part of the yield curve inverts

Investors aren’t waiting to find out.

They pulled close to $200 million from the $781 million iShares MSCI Europe Financials ETF, known by its ticker EUFN, on Tuesday. That marks a record outflow for the fund, which is the largest U.S.-listed strategy tracking European bank equities. EUFN absorbed $229 million worth of trades in the session, the most in over a year, according to data compiled by Bloomberg. Its largest holdings include HSBC, Allianz SE and Banco Santander.

Bond ‘Armageddon’ Pummels Global Banks as Recession Panic Swirls

Heeding signals from government bonds, Mark Holman is taking greater steps to prep for a downturn. The London-based chief executive of TwentyFour Asset Management has cut credit duration in his portfolios to the shortest in a decade and increased exposure to government bonds.

“Virtually every day for the past month we’ve been adding more risk-off assets into our portfolios,” he said. “When commercial banks tighten, they tighten by lending lower volumes or via higher rates or by selecting only high-rated borrowers. Usually it’s pretty quick.”

--With assistance from Cecile Gutscher and Carolina Wilson.

To contact the reporters on this story: Justina Lee in London at jlee1489@bloomberg.net;Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Sid Verma, Cecile Gutscher

©2019 Bloomberg L.P.