Banks increasing their acquisitions
According to a Bloomberg report, the resurgence in acquisitions comes amid a rise in deposits, prompting banks to seek avenues to deploy this influx of capital. With traditional lending options constrained due to subdued loan demand and increased defaults resulting from two years of interest rate hikes, banks are turning to high-quality securities as an alternative to optimize returns while managing credit risk.
Market analysts note that this renewed demand, although modest thus far, is contributing to the upward trajectory of the credit markets. Spreads on new CLOs have narrowed significantly in recent weeks, while MBS have rebounded from historically low levels. John Kerschner, head of US securitized products at Janus Henderson, emphasized the pivotal role of bank demand in driving the credit rally, predicting a sustained increase in bank investments in CLOs and MBS.
“The credit rally has multiple drivers, but an important piece of it is bank demand and we’re expecting only to see more of that,” said Kerschner.
The resurgence in bank deposits, following a downturn triggered by Silicon Valley Bank’s collapse in March, has been fueled by higher yields on savings accounts, culminating in a nearly $500 billion increase between April and December 2023, according to data compiled by Barclays Plc.
Traditionally, major banks have favored high-quality debt, such as Treasuries and agency MBS, opting to manage credit risk in their loan portfolios while mitigating interest rate risk in their bond holdings. There has been a notable uptick in agency MBS holdings, with Citigroup strategists reporting a $74 billion increase since late October. The tightening of spreads underscores the growing attractiveness of MBS, with the yield gap on newly issued Fannie Mae current coupon MBS narrowing significantly in recent months, according to data compiled by Bloomberg.
Source: mpamag.com