Global credit spreads increase on banks' exposure to bad loans

Global credit spreads are heading for the biggest weekly increase in four months as bubbling property market stresses prompt banks to increase bad-loan provisions.

Spreads on corporate bonds globally have widened eight basis points since last Friday, the biggest weekly jump since early October, while those on investment-grade financial bonds have risen seven basis points, Bloomberg indexes showed. Spreads on bonds issued by Asian lenders are about one basis point higher on average Friday.

Bad news stemming from banks’ real estate exposure is coming thick and fast. Shares in US regional lender New York Community Bancorp slid by almost 50% over the past two days after it ramped up provisions for loan losses, while Japan’s Aozora Bank Ltd. forecast an annual loss due to bad loans linked to US commercial real estate. Deutsche Bank AG more than quadrupled its US property loss provisions.

“For the first time since late October, market sentiment has turned markedly negative,” Goldman Sachs Group Inc. analysts including Lotfi Karoui in New York wrote in a research note. Investors should add “a dose of hedges to credit portfolio” as weaknesses in US regional banks add to the risk-off mood, they said. 

Concerns are mounting about the potential pain for banks as elevated interest rates push down commercial property values in the US and elsewhere, and make it more difficult for developers in refinancing their debt. The downbeat news from banks comes just as the Federal Reserve this week pushed back against the prospect of an interest-rate cut in March.

Shares in Aozora Bank extended losses Friday, plummeting as much as 19% in Tokyo. Spreads on the bank’s dollar bonds maturing in 2026 have more than doubled over the past two days, according to data compiled by Bloomberg.