Low yields for longer backs credits

Headlines

• Low yields for longer backs credits

• Strong performance from Senior Financials

• Low activity in primary markets

Market commentary

Geopolitical tension and concerns about the validation of the European recovery have sparked a minor sell-off over the summer but during the last week, credit spreads have improved and we expect this trend to continue. The growth and inflation outlook for the eurozone have weakened, emphasised by 10Y Bund yields yesterday briefly touching ground with the 1% mark for the first time, which in our view will secure low rates for a prolonged period. Consequently, technicals are supportive of credits as the search for yield via higher beta and duration continues backed by accommodative measures from the ECB, including the first TLTRO in September (and maybe more to come).

Strong performance in Senior Financials
As seen in the chart on the next page, iTraxx Senior Financials has outperformed iTraxx Main over the past 18 months and currently trades on par (before the financial crisis banks traded tighter than the Main index, thus the ratio was below 1). Banks have benefited from deleveraging recently through both internal and external capital generation (profits and right issues) but also through asset disposals, improving risk-weights modelling and low funding needs. With the results of the AQR from the ECB coming up over the next couple of months, which could create some jitters, and the strong performance over the past 18 months, we are becoming more cautious on the asset class and think better value can be found in subordinated financials or in corporates.

Primary markets
There is still very low activity in the primary markets as it is holiday season in most southern European countries but we expect a gradual improvement in volumes in August and the markets to take off in September. We expect a busy autumn.