New York open: Cuckoo for CoCos

In the wake of the mega EU bank merger, the excess premium investors had been demanding to hold European bank paper now has room to compress from oversold levels.

It seems folks interpreted the attack on CoCo bonds and CDS in Asia as a systemic risk brewing, but nothing could be further from the truth. Asia banks have little in the way of US contagion risk since they only interact internationally with the strongest and largest US financial institutions. Big Wall Street banks are benefiting from the Fed liquidy injections and the influx of deposits from former regional bank depositors. At the same time, basis swaps suggest little in the way of “dialling for dollar in Asia.

Still, Sentiment vis-à-vis the AT1 bond asset class will likely remain weak following last night's deal. The UBS takeover will trigger a complete write-down of Credit Suisse's USD-denominated AT1 bonds. It also represents the most significant loss ever inflicted on AT1 investors since the birth of the asset class post-global financial crisis. Unfortunately, these are instruments most people have never heard of, not to mention neither have many analysts. How can AT1 bonds be zeroed when they're more senior than equity, which is getting paid 3bn, you ask? Because bondholders agreed they could be.

While ViX is trading at the top of the recent range but looks prime to fall to the bottom of that range as traders are looking sell volatility after the multiple levels of policy salve were layered across multiple jurisdictions. Still, when taken together with the genuinely stunning drop in front-end yields, there's lots of kindling to light the rally fires, notwithstanding a strong chance of a Fed pause.

The Fed does not have to hike this week given the current tightening in financial conditions, notwithstanding the fact oil prices have dived the plunge tank in Q1; hence the inflation problem looks less urgent now than last summer because near-term inflation expectations have fallen sharply, and long-term inflation expectations have remained anchored. But more specifically, during periods of intense bank stress is not a complicated reason why calls for a Fed pause have been raised. It makes little sense to tighten monetary policy amidst ongoing stress in the banking system that could present substantial downside risk to the economy.

But perhaps the best news of the day is that no major economic data releases are scheduled in New York.