Credit did better this week after a heavy widening of spreads last week, mainly driven by statements about a strong start to 2009 from some large global banks. Do not overestimate this, as seasonality may be the reason – but hopefully not. On a different note, the iTraxx indices will have their bi-annual rolls next Friday.
After the poor stock and credit market performance last week, this week has seen some improvement – primarily in the equity market. Banks in particular have rallied following a number of bullish statements from some of the larger banks (e.g. Citigroup, Bank of America, and Nordea) citing a strong start to the year.
Although it is positive and encouraging that banks have had a good start to 2009 we would like to add a bit of party-pooping. First of all, banks tend to have lower loan losses in Q1 than in Q4 because the year-end report is audited and therefore banks are more critical in the assessment of their loan books at year-end. Second, some banks have reported that trading income has been very strong. We highlight that this income stream is of lower quality (i.e. not as sustainable) than e.g. net interest income. Overall, we hold the view that banks face a tough year and are not out of the woods yet.
The investment grade CDS index, iTraxx Europe, currently trades at 193bp compared to 205bp last Friday. The high yield index iTraxx Crossover currently trades at 1080bp compared to 1144bp last week. Itraxx Senior financials trades around 193bp compared to 200bp a week ago.
