Summary

  • A strong opening to 2010 for the credit market
  • Banks have been frequent issuers in the primary market

Headlines from the credit market this week

Welcome to the first weekly credit update of the decade. Whether the new decade can live up to the old one in terms of – let’s say – interesting events is doubtful. So far the credit markets have enjoyed a very fine start. The high yield market and the Tier 1 market – being the high beta parts of the credit universe – have performed particularly strongly as risk appetite remains strong and implied volatility keeps coming down. For the moment it seems that there is no end to the appetite for cash credit and CDS spreads have also followed after the last couple of months saw CDS indices remaining range bound. The investment grade index, iTraxx Europe, currently trades at 68bp while the high yield index iTraxx Crossover currently trades at 393bp, which is more than 50bp tighter than before Christmas. Should negative surprises hit the financial markets we could easily see CDS spreads moving significantly wider from current levels whereas the cash market is likely to remain more resilient on the back of the abundance of cash.

As expected the primary market has opened up with hefty activity. What is perhaps a little surprising is the large number of deals from banks within senior bonds and covered bonds where the latter segment has been particularly busy. It seems that banks want to take advantage of the current very benign conditions in the primary financial markets and get much of their funding needs in place at an early stage. Should the current trend continue in the next weeks and months, the second half of the year could very well be relatively quiet in terms of issuance from banks. For corporates we expect a relatively high degree of issuance in 2010 as companies are likely to continue to diversify away from reliance on bank financing. Furthermore, current financing costs are very low in a historical context and therefore the corporate bond market currently offers good possibilities for longer-term financing.