Saturday, June 19, 2010

Green shoots in the primary market


Summary

  • Stress testing of European banks to be made public on a name-specific basis
  • Spreads have ground tighter
  • Green shoots in the primary market

Market Comment

Spain remains top of the agenda in the credit market with bank and Government officials stating during the week that Spanish financial institutions have more or less been shut out from the international funding markets. However, relief arrived after European leaders moved closer on an agreement on a stress test for the 25 largest EU banks in order to promote transparency. It may have been Spain’s move on Wednesday to publish its own banking stress tests that led to the EU-wide effort. The EU leaders concluded that the test results should be published by the end of July. In a Nordic context we do not expect the stress test to reveal anything of concern or interest (of the Nordic banks only Nordea and Danske Bank are subject to stress testing). The four large Swedish banks have already been stress tested by the Swedish Central bank and the Swedish FSA and the results have been made public on a name-specific basis. In Denmark, the Central Bank has also carried out stress testing for several years (although anonymous).
Currently, iTraxx Europe trades at 120bp while Crossover trades at 535bp and both indices have tightened since last week. Trading of cash bonds in the secondary market remains subdued although slightly improved compared to last week. Overall, thin volumes do not bode well for optimism and suggest that investors prefer to stay sidelined and wait for the primary market to regain momentum. In that respect there has – at last – been something to cheer about as the primary market has reopened, albeit mainly for issuers in Northern Europe (mostly covered bonds though). Looking ahead we view further issuance of covered bonds as likely whereas senior financials will continue to be scarce in supply as the investor appetite for this asset class seems limited for the time being.

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