Kroll Bond Rating Agency (KBRA) has issued a new report entitled “Spread Volatility, Slowing Mortgage Sector Depress Financials.” The report makes the following key points:

  • Since the November election, the traditional laws of financial gravity have been scrambled to a degree that makes the previous eight years of quantitative easing and negative interest rates seem normal by comparison. Investors have taken market valuations up by a third or more based upon the expectation of what President-elect Donald Trump will do in terms of policy. KBRA asks: When will investor behavior start to coincide with market and economic fundamentals?
  • The fact that high-yield spreads have fallen about 20% since October represents a significant bull indicator for the U.S. economy, yet it comes at the same time that yields on Treasury and agency securities have risen by a like amount, dampening activity in housing and related sectors. KBRA believes that as investors come to understand that significant spending increases and tax cuts are months away, the likelihood of a rally in the Treasury bond market will grow.
  • As KBRA has noted previously, the fundamentals of banks are unlikely to change dramatically or quickly as a result of rising interest rates. Gains in terms of net interest margin will be small and volatile quarter-to-quarter as the cost of funds for market sensitive money center banks also rise. Indeed, financials may suffer in the near term due to the negative impact of rising Treasury yields on the housing sector. As 2017 progresses, we expect that falling lending volumes for residential and commercial real estate will be a continued drag on volumes and earnings for financials.

To view the report, please click here.

About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).