Summary
- Credit market showing signs of weakness on the back of sovereign debt fears
- Significant further bank regulation on the cards in the US
Headlines from the credit market this week
Significant signs of weakness have crept into the credit market. It seems like the credit market is significantly more worried about the Greek problems than the equity market and some sort of decoupling has taken place although the equity market has also struggled during the last couple of trading sessions. As usual in times of volatility, CDS indices have underperformed cash indices. Bank indices have underperformed, which is not surprising in an environment of sovereign debt concerns given that banks and sovereigns following the wide-scale bailouts of the banking sector are deeply dependent on each other (with many banks having large sovereign exposures and sovereigns having large – implicit – bank exposures).
As was the case in March last year, CDS indices are currently somewhat dislocated with sovereigns trading at the same level as senior financials, which again are trading wider than (IG) non-financials. Normally, it is the other way around and we consider the current situation to be a reflection of a very cautious attitude among credit investors for the moment. Currently, iTraxx Europe trades at 82bp (up 8bp w/w), Crossover trades at 452bp (up 40bp w/w), the senior financial index trades at 86bp (up 12bp w/w) while the sovereign CDS index (consisting of Western European countries) trades at 86bp (up 7bp w/w). Going forward, we think that spreads could continue to be somewhat under pressure in the coming weeks – this also includes cash spreads as more sellers seem to be emerging and the primary market is under pressure (see our separate comment on the primary market below).
