Banks worth $47 trillion adopt new U.N.-backed climate principles

UNITED NATIONS - Banks with more than $47 trillion in assets, or a third of the global industry, adopted new U.N.-backed “responsible banking” principles to fight climate change on Sunday that would shift their loan books away from fossil fuels.

Deutsche Bank (DBKGn.DE), Citigroup (C.N) and Barclays (BARC.L) were among 130 banks to join the new framework on the eve of a United Nations summit in New York aimed at pushing companies and governments to act quickly to avert catastrophic global warming.

“These principles mean banks have to consider the impact of their loans on society – not just on their portfolio,” Simone Dettling, banking team lead for the Geneva-based United Nations Environment Finance Initiative, told Reuters.

Under pressure from investors, regulators and climate activists, some big banks have acknowledged the role lenders will need to play in a rapid transition to a low-carbon economy.

Financing for oil, gas and coal projects has come under particular scrutiny as climate scientists step up calls to change the global economy’s deep reliance on fossil-fuels to avert disastrous warming.

The principles, drawn up jointly by U.N. officials and banks, require lenders to:

- Align their strategies with the 2015 Paris Agreement to curb global warming and U.N.-backed targets to fight poverty called the Sustainable Development Goals

- Set targets to increase “positive impacts” and reduce “negative impacts” on people and the environment

- Work with clients and customers to encourage sustainable practices

- Be transparent and accountable about their progress.

The principles’ main backers say the norms will encourage banks to pivot their loan portfolios away from carbon-intensive assets and redirect capital to greener industries.

Critics argue that banks should go much further by explicitly committing to phasing out financing for fossil fuel projects and agribusiness that drive deforestation in the Amazon, Southeast Asia and other regions.

However, the new standards could also force participating banks to choose between foregoing business from clients in high-carbon sectors and the risk of being accused of backsliding on the principles if they continue to finance such firms.

Although the initiative is voluntary, Dettling, who played a central role during 18 months of negotiations with a core group of 30 founding banks, said lenders would be reluctant to accept the reputational risk of losing their signatory status.

Banks in Europe, in particular, also face growing regulatory pressure to disclose their exposure to the potential impact of climate-related disasters and a low-carbon energy transition on their asset base.

Other banks to join the “Principles for Responsible Banking” initiative included Danske Bank (DANSKE.CO), ABN Amro (ABNd.AS), BNP Paribas (BNPP.PA), Commerzbank (CBKG.DE), Lloyds Banking Group (LLOY.L) and Societe Generale (SOGN.PA), according to a statement.


Hong Kong follows US Fed’s 25 basis point rate cut, just in time for city’s stalling economy and kickoff of Budweiser’s mega IPO

HONG KONG - Hong Kong’s monetary authority cut its base lending rate for the second time this year in lockstep with the US Federal Reserve’s widely expected move overnight, reducing the cost of money just as a slowing local economy teeters on the brink of a technical recession.

The city’s de facto central bank reduced the base lending rate by 25 basis points to 2.25 per cent effective immediately, matching a similar cut by the US Fed. Commercial banks in the city are likely to keep their prime rate unchanged at between 5.125 per cent and 5.375 per cent.

“The interest rate cut will benefit the capital markets and economic activities in Hong Kong, “ Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, said in a media briefing after the rate cut.

“The global economy is on a downward trend as a result of the trade war between China and the US. The local social unrest has hit hard tourism, retail and restaurant businesses. The HKMA and banks will work together with the government to help (small and medium enterprises) cope with the challenging time,” he said, referring to earlier announced measures to ensure businesses have funds to stay afloat.

Banks may not immediately follow the rate cut, he said, adding the current interest rate level remains low, with a typical mortgage rate at around 2 per cent.

Chan also said the US Fed has a mixed view on the future interest rate trend as seven members expect more rate cuts, five expect a rate rise while five unchanged.

For the stock market, the HKMA’s rate cut comes just after Budweiser dusted off the IPO it had shelved weeks earlier in the midst of protests that have threatened the city’s reputation as an international financial centre. At US$4.8 billion, Budweiser’s IPO is half its original size but still the biggest in Hong Kong this year.


Fed Intervenes to Curb Soaring Short-Term Borrowing Costs

UNITED STATES - For the first time in more than a decade, the Federal Reserve injected cash into money markets Tuesday to pull down interest rates and said it would do so again Wednesday after technical factors led to a sudden shortfall of cash.

The pressures relate to shortages of funds banks face resulting from an increase in federal borrowing and the central bank’s decision to shrink the size of its securities holdings in recent years. It reduced these holdings by not buying new ones when they matured, effectively taking money out of the financial system.

Separately, the Fed’s rate-setting committee began a two-day policy meeting Tuesday at which officials are likely to lower the federal-funds range by a quarter-percentage point to cushion the economy from a global slowdown, a decision unrelated to the funding-market strains.

The federal-funds rate, a benchmark that influences borrowing costs throughout the financial system, rose to 2.25% on Monday, from 2.14% Friday. The Fed seeks to keep the rate in a target range between 2% and 2.25%. Bids in the fed-funds market reached as high as 5% early Tuesday, according to traders, well above the band.

The New York Fed moved Tuesday morning to inject $53 billion into the banking system through transactions known as repurchase agreements, or repos. The bank said Tuesday afternoon it would inject up to $75 billion more on Wednesday morning, but many in the market were looking beyond that decision. “The market will be waiting to see if the Fed makes this a more permanent part of the playbook,” said Beth Hammack, the Goldman Sachs Group Inc. treasurer.

Fed policy makers set their target range to influence a suite of short-term rates at which banks lend to each other in overnight markets—but those rates are ultimately determined by the markets. If various operations in the markets fail, the fed-funds rate can deviate significantly from the target.

In the short run this likely affects only market participants who borrow in the overnight markets, but if the strains last long enough it can affect the rates other businesses and consumers pay.

Such deviations also undercut the Fed’s ability to keep the economic expansion on track through monetary policy, such as by lowering rates to provide a boost and raising them to prevent the economy from overheating.

The New York Fed hasn’t had to intervene in money markets since 2008 because during and after the financial crisis, the Fed flooded the financial system with reserves—the money banks hold at the Fed. It did this by buying hundreds of billions of dollars of Treasurys and mortgage-backed securities to spur growth after cutting interest rates to nearly zero.

Reserves over the last five years have been declining, after the Fed stopped increasing its securities holdings and later, in 2017, after the Fed began shrinking the holdings. Reserves have fallen to less than $1.5 trillion last week from a peak of $2.8 trillion.

The Fed stopped shrinking its asset holdings last month, but because other Fed liabilities such as currency in circulation and the Treasury’s general financing account are rising, reserves are likely to grind lower in the weeks and months ahead.

In addition, brokers who buy and sell Treasurys have more securities on their balance sheets due to increased government-bond sales to finance rising government deficits.


Moody's changes outlook on Hong Kong's Aa2 rating to negative from stable; affirms rating

SINGAPORE - Moody's Investors Service has today changed the outlook on the Aa2 issuer rating of the Government of Hong Kong to negative from stable, and affirmed the Aa2 long-term issuer and senior unsecured ratings.

The change in outlook to negative reflects the rising risk that the ongoing protests reveal an erosion in the strength of Hong Kong's institutions, with lower government and policy effectiveness than Moody's had previously assessed, and undermine Hong Kong's credit fundamentals by damaging its attractiveness as a trade and financial hub.

The affirmation of the Aa2 rating reflects, among other things, Hong Kong's strong fiscal and external buffers, with a minimal government debt burden, large fiscal reserves and ample foreign exchange reserves, all of which offer resilience to shocks and negative long-term trends.

Moody's has also affirmed the Aa2 senior unsecured foreign currency ratings of the Trust Certificates issued by Hong Kong Sukuk 2014 Limited and Hong Kong Sukuk 2015 Limited, special purpose vehicles established by the Government of Hong Kong. The payment obligations associated with these certificates are direct obligations of the government and rank pari passu with other senior unsecured debt of the government.

Hong Kong's long-term foreign-currency bond ceiling and the local currency bond and deposits ceilings remain at Aaa, and the long-term foreign currency deposits ceiling remains at Aa2. Hong Kong's short-term foreign currency bond and bank deposits ceilings remain unchanged at P-1.


Oil surges, stock futures slip after attack on Saudi facility

ASIA - Oil prices surged to six-month highs on Monday while Wall Street futures fell and safe-haven bets returned after weekend attacks on Saudi Arabia’s crude facilities knocked out more than 5% of global oil supply.

U.S. crude futures were last up 11% at $61.10 a barrel, coming off highs on expectations other global oil suppliers would step in to lift output. Brent crude soared 13% at $68.06 after earlier rising to $71.95.

Those fears powered safe-haven assets, with prices for gold climbing 1% in early Asian trade to $1,503.09.

Moves in Asian share markets were small, however, with Japan shut for a public holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan was a tick lower at 515.4. Australian shares were down 0.1% while South Korea’s KOSPI was a tad higher.

“One immediate question this (attack) poses for bond markets is whether a further rise in the inflation expectations component of bond yields - which have proved historically sensitive to oil prices - will give this month’s sharp bond market sell-off fresh impetus,” said NAB analyst Ray Attrill.

“Or will safe haven considerations dominate to drive yields lower?  Watch this space.”

In early Asian trading, futures for U.S. 10-year Treasury notes rose 0.3%, indicating yields may slip when cash trading begins.

Global bonds were sold off last week, sending yields higher, led by a broader risk rally on hopes the United States and China would soon end their long trade war. Better-than-expected U.S. retail sales data also boosted sentiment.

Chinese data for industrial production, retail sales and fixed asset investment will be released later on Monday, which could help set the tone for this week.

Investors also await the outcome of the U.S. Federal Reserve’s policy meeting on Wednesday at which it is widely expected to ease interest rates and signal its future policy path.


Euroclear plans bond investment link with China

CHINA - Euroclear plans to open a link for international investors to access the Chinese bond market, which will allow RMB-denominated debt to be used as collateral anywhere in the world.

The move from Euroclear, one of the world’s biggest securities depositories, is the latest step in China’s efforts to attract foreign investment into the country’s financial markets while promoting the global use of its currency. Euroclear plans to partner with China Central Depository and Clearing, a state-owned financial market infrastructure provider, to create the link. 

The recent addition of some Chinese equities in MSCI’s flagship emerging markets index, as well as the planned inclusion of Chinese government debt in Bloomberg and JPMorgan Chase indices, are expected to usher a windfall of more than $2 trillion in foreign investments into the country over the next two years, reported the FT.

China has gradually launched a number of schemes that allow limited access for foreign investors to China’s domestic market. Bond Connect, launched in 2017, allows foreign fund managers to trade in China’s government and corporate debt markets without setting up an onshore trading entity.


TREASURIES-Yields tick lower as data, Fed firm up 25 bp cut expectations

UNITED STATES - A mixed employment report on Friday morning and an even-keel message from U.S. Federal Reserve Chair Jerome Powell left yields modestly lower, firming up market expectations the central bank will cut interest rates by the expected 25 basis points at its September meeting.

The Fed will continue to act “as appropriate” to sustain an economic expansion now in its 11th year, Powell said Friday in Zurich, repeating a pledge that financial markets have taken to signal a further reduction in interest rates.

Treasury yields were modestly lower than where they had been going into the panel discussion, with the two-year yield down 1.6 basis points to 1.524% and the 10-year yield down 1.7 basis points to 1.548%. The Labor Department’s report earlier Friday showed job growth had slowed more than expected in August, but losses were cushioned by strong wage gains, which should support consumer spending and keep the economy expanding moderately amid rising threats from trade tensions.

The economy’s waning fortunes, underscored by an inversion of the U.S. Treasury yield curve, have been largely blamed on the White House’s year-long trade war with China. Washington and Beijing slapped fresh tariffs on each other’s exports on Sunday. While the two economic giants on Thursday agreed to hold high-level talks in early October in Washington, the uncertainty, which has eroded business confidence, lingers.

The jobs report is unlikely to change what the Fed does at its next monetary policy meeting. “The labor market continues to be the strongest point of data across the economic landscape, and that’s not what has been the catalyst for the Fed shifting to an easing bias,” added Merz.


With 49 Deals in 30 Hours, U.S. Corporate Bond Market Ignites

UNITED STATES - Companies are borrowing $74 billion in the U.S. investment-grade bond market this week, the most for any comparable period since records began in 1972. Since Tuesday, corporations including Coca-Cola Co., Walt Disney Co., and Apple Inc. have sold notes as yields have dropped.

And the frenzy isn’t letting up. At least another $50 billion is projected for the rest of the month, and the activity is spilling over to junk bonds and leveraged loans as well. With more than $16 trillion of bonds in Europe and Asia paying negative yields, investors worldwide are snatching up debt that offers relatively higher returns, keeping demand strong in the U.S.

For investment-grade companies, the average yield on bonds was 2.77% as of Wednesday, according to Bloomberg Barclays index data. In late November, that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings, before taxes. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.

It’s not clear how long that will last -- on Thursday, U.S. Treasury yields surged, with the 10-year note jumping as much as 0.12 percentage point to 1.59%. But for now the bond sales are intense enough to make up for a year that had previously been lackluster. Investment-grade issuance is now down just about 2% from the same point last year. In June, the gap was closer to 13%.

The recent spate of issuance is the latest surge in corporate debt sales, as companies have ramped up their borrowings to buy back shares and invest in new projects. Investment-grade debt outstanding totaled $5.8 trillion on Wednesday, more than double the level a decade ago.

The underwriting fees that the sales are generating are one of the few positives for bank profits that are expected to get hit by falling rates. The refinancing can also translate into greater trading revenues, said Bloomberg Intelligence analyst Arnold Kakuda.

It’s a stunning turnaround from late last year, when Scott Minerd, Guggenheim Partners’ global chief investment officer, said a sell-off in General Electric Co. debt signaled that “the slide and collapse in investment grade credit has begun.” While the investment-grade market last year generated losses of 2.5%, this year it’s up 14.2% including both interest and price gains, making it one of the best-performing assets in fixed income.

In the leveraged loan market, 17 deals totaling more than $16 billion have launched this week, making it the busiest week since October. Investment-grade and high-yield bankers are telling clients that the good times may not last.


China’s Private Bond Defaults Climb to Record $4.4 Billion

CHINA - More Chinese companies are defaulting on private bonds this year as the slowing economy weighs on weaker companies and firms seek to repay publicly traded debt first.

The nation’s issuers have missed repayments on a record 31.8 billion yuan ($4.4 billion) of private bonds this year through August, compared with 26.7 billion yuan for all of 2017 and 2018 combined, according to data by China Chengxin International Credit Rating Co., one of China’s biggest rating firms.

HNA Group International, a unit of struggling private conglomerate HNA Group, honored a $300 million note due Aug. 18, after missing repayment on a 1.5 billion yuan private bond at the end of July. An HNA Group representative declined to comment on whether the private debt had been repaid when contacted by Bloomberg.Total corporate bond defaults in China year-to-date were at 78.4 billion yuan, up 51 % from the same period last year due to a slowing economy.

There are signs the defaults are weighing on demand for such notes. Issuance of privately-placed corporate notes in China declined in the four months through July, in the longest falling streak in over two years, before rising to around 160 billion yuan in August, according to bond issuance data compiled by Bloomberg.

Investors are also asking for higher risk premium on privately issued notes. The average coupon difference between new sales of private and public bonds was 154.2 basis points in January, the spread rose to 179.5 basis points at end-August, according to data compiled by Bloomberg.

The ratio of delinquency to total private notes outstanding was 0.63%, more than double a proportion of 0.26% in the public bond market, according to China Chengxin International Credit Rating data.