It has been a volatile week for bank stocks and subordinated bank capital. Still, CDS indices have held up reasonably well and primary market activity continues to be high. In Denmark, a second credit package for banks was launched targeting a recapitalisation of the sector. On another note, the Bank of England has been authorised to buy corporate bonds directly in the secondary or primary market.
Banks’ share prices have been exceptionally volatile during the week, adding to their woes and demonstrating that they are far from being out of the woods. In our opinion, newsflow has not been as bad as the movements in share prices might suggest – the latter is in our view driven by increasing fears of widespread nationalisations of banks. The UK government has increased its ownership of RBS by converting its preference shares to ordinary shares in order to bolster the core Tier 1 ratio. The action follows the realisation that substantial further writedowns are in the pipeline for RBS.
Despite the volatile equity prices, the investment grade CDS index has held up reasonably well. iTraxx Europe is currently trading at 172bp compared with 165bp last week. The high yield index iTraxx Crossover has underperformed and is now trading at 1085bp compared with 995bp last week. In the cash market, Tier 1 bonds from banks have seen significant price falls.
