Senior & Subordinated Financials Spreads

iBoxx EUR Financials Index data provided by Markit Group Ltd

i) Senior Financials Spreads

Senior financial debt spreads came under considerable pressure in 2018, the iBoxx cash index widening by 74bp to B+157bp. Supply had been taken down well and we had the lowest year for senior deals since the beginning of the euro currency era – all to no avail as the lower primary dynamic failed to support the market.

Given how we have started 2019, concerned about macro and geopolitics and again with considerable volatility and uncertainty, we are again looking for a lower supply dynamic. Spread will widen, but we are looking for only moderate weakness.

See below for further charts.

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Credit takes a much-needed breather

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ii) Senior Financials Spreads 2015-

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iii) Subordinated Spreads

The subordinated debt markets also saw considerable weakness with the index almost doubling, in spread terms. Much of that weakness came from the CoCo sector where prices fell sharply (spreads gapped) on the back of weakness seen in other markets but also afflicted by single name event risk (Deutsche Bank, for example). We are likely going wider in the near term.

There are some good opportunities in the AT1 market now, with yields exceeding 8%. Single name selection will be an important consideration in the choice of issue. LT2 also curries some favour, albeit one will be hampered by liquidity.

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iv) Subordinated Spreads 2015-


 

v) 2008-2009: Sub financials collapse and recovery

Weds Chart