This story came out yesterday morning, but so far seems spot on as banks, and European banks in particular are under pressure. Complacency was setting in, and carry sounds great, except when mark to market and volatility get in the way.
Europe Bank Risk Premium Vanishing on ECB Cash: Credit Markets
2012-02-09 17:35:14.473 GMT
By John Glover, Abigail Moses and Sridhar Natarajan
Feb. 9 (Bloomberg) — The premium investors demand to
protect European bank bonds rather than those from the U.S. has
been cut in half in the past month as the region’s lenders are
flooded with cheap funds.
Credit-default swaps on 13 European banks including BNP
Paribas SA and UniCredit SpA converged with those tied to the
six largest U.S. peers such as Citigroup Inc. and JPMorgan Chase
& Co., with the gap at 17 basis points as of yesterday, down
from 33 on Jan. 9, according to data provider CMA.
The gap is narrowing as the European Central Bank bolsters
confidence in euro-region financial institutions through an
unprecedented emergency lending program. After drawing down 489
billion euros ($648.3 billion) in December, banks will be given
a second opportunity to tap the ECB for 1 percent loans at the
end of the month. Investors are also speculating a 130 billion-
euro rescue package for Greece may stave off a new round of
contagion in the euro area.
“The ECB has demonstrated its support for the banking
system, which is the Achilles heel of the euro zone,” said Don
Smith, a London-based economist at ICAP Plc, the biggest broker
of transactions between banks. “The feeling is that the impact
of a Greek departure from the euro might not be that
catastrophic. The data out of the U.S. is also looking much
stronger than expected.”
The extra yield investors demand to hold bonds of European
banks rather than government debentures was 303 basis points
yesterday, compared with 292 basis points for their U.S. peers,
Bank of America Merrill Lynch index data show. The spreads on
European banks were 1 basis point narrower on Feb. 1 after being
as much as 51 basis points wider on Dec. 5.
European bank bonds have returned 4.08 percent this year,
compared with a gain of 4.38 percent for debt from U.S. lenders,
Bank of America Merrill Lynch index data show. Last year, the
European debt gained 0.31 percent versus 1.7 percent in the U.S.
Elsewhere in credit markets, a benchmark gauge of U.S.
company credit risk declined for a second day, with the Markit
CDX North America Investment Grade Index, which investors use to
hedge against losses or to speculate on creditworthiness,
decreasing by 0.3 basis point to a mid-price of 94.3 basis
points as of 12:25 p.m. in New York, according to Markit Group
Ltd. That’s the lowest level on an intra-day basis since Aug. 1.
The index typically falls as investor confidence improves
and rises as it deteriorates. Credit-default swaps pay the buyer
face value if a borrower fails to meet its obligations, less the
value of the defaulted debt. A basis point equals $1,000
annually on a contract protecting $10 million of debt.
The market for corporate borrowing via commercial paper
rose for the fifth straight week. The seasonally adjusted amount
of U.S. commercial paper climbed by $700 million to $972.9
billion outstanding in the week ended yesterday, the Federal
Reserve said on its website. That’s the highest level since Dec.
21, according to Fed data compiled by Bloomberg. Foreign
financial firms’ issuance rose $8.4 billion to $167.6 billion
outstanding, the fifth weekly rise and the largest gain since
May, the data show.
Companies issue commercial paper to fund everyday payments
such as rent and salaries. The amount issued by U.S.-based
financial companies dropped by $4.1 billion to $287.8 billion
outstanding, according to the Fed.
Bonds of Freeport-McMoRan Copper & Gold Inc. are the most
actively traded U.S. corporate securities by dealers today, with
152 trades of $1 million or more as of 12:27 p.m. in New York,
according to Trace, the bond-price reporting system of the
Financial Industry Regulatory Authority. The Phoenix-based
company sold $3 billion of debt yesterday.
The ECB’s so-called longer-term refinancing operation has
succeeded in heading off a potential credit crunch in Europe and
allowed banks to return to the senior unsecured bond market.
Sales of the securities dried up in the second half of 2011 amid
investor concern banks may be hurt by losses on their sovereign
“It’s like having a patient who is bleeding and you have
put a tourniquet on to help stabilize and see if you have a
cure,” said Thomas Chow, a money manager at Delaware
Investments in Philadelphia.
Issuance of senior unsecured euro debt by banks fell about
35 percent to 51.4 billion euros in the six months ended Feb. 6
from the same period a year earlier, data compiled by Bloomberg
show. The average relative yield on the debt has fallen from an
18-month high of 448 basis points at the end of November,
according to Bank of America Merrill Lynch’s EUR Corporates,
Banco Bilbao Vizcaya Argentaria SA this week became the
first Spanish bank since in more than four months to sell
senior, unsecured notes when it raised 2 billion euros from an
issue of 18-month securities. The debt was priced to yield 193
basis points more than the benchmark swap rate and compares with
a 250 basis-point spread that Spain’s second-largest bank,
offered on similar-maturity notes it sold in October.
Intesa Sanpaolo SpA, Italy’s second-biggest bank, sold
senior unsecured bonds on Jan. 31 in the first benchmark
offering of the debt from one of the country’s lenders since
July. The 1.5 billion euros of 18-month bonds were priced to
yield 295 basis points, or 2.95 percentage points, more than
swaps, Bloomberg data show.
“It’s risk on for Europe,” said Hank Calenti, an analyst
at Societe Generale SA in London. “The region is benefitting
from the Draghi drug of LTRO.”
The convergence between banks on the two sides of the
Atlantic may have gone too far because the European crisis is
far from a solution, according to Alberto Gallo, a strategist at
Royal Bank of Scotland Group Plc in London. Greece is struggling
to reach an accord with its creditors and meet lenders’ terms
for new loans, a situation that may force the nation to leave
the euro. The region still has too many banks that are too weak
and too entwined with their sovereigns.
“Fundamentals remain challenging in Europe,” Gallo said.
“Even if you have liquidity, you still have an overbanked
banking system in Europe, with recession and austerity measures
for a long time to come.”
Money market indicators are also signaling returning
confidence with the cost for European banks to borrow in dollars
falling to the lowest in six months. The three-month cross-
currency basis swap, the rate banks pay to convert euro interest
payments into dollars, was 70 basis points below the euro
interbank offered rate yesterday, according to data compiled by
The Markit iTraxx Financial Index of credit-default swaps
on 25 European banks and insurers has tumbled 155 basis points
since Nov. 25 to 203 basis points, JPMorgan prices show. The
gauge dropped by the most ever last month.
Global bank bonds returned 5.21 percent in December and
January, the biggest two-month gain since the period ended in
August 2009, when bank debt gained 5.29 percent, and has risen
another 0.54 percent since then, Bank of America Merrill Lynch
index data show.
The securities are also being buoyed by signs the U.S.
economy is recovering. Job openings in the U.S. increased in
December by 258,000, the biggest gain since February 2011, to
3.38 million, the Labor Department in Washington said Feb. 7,
showing employers are gaining confidence the economy will keep
growing in 2012.
An improving job market may be helping underpin household
sentiment. The Bloomberg Consumer Comfort Index rose to minus
44.8 in the week ended Jan. 29 from minus 46.4 the previous
period. Gains in employment and post-holiday clearance sales at
retailers also helped create a better buying climate for
consumers, a report showed.
“Investors had become so pessimistic and underweight
European banks, that all it took was a brief window without
disaster headlines to spark a strong rally,” said Peter Tchir,
founder of TF Market Advisors in New York. “Now that European
banks have caught up to U.S. bank valuations, the pendulum has
swung too far, and European banks seem overvalued.”
For Related News and Information:
Top bond stories: TOP BON <GO>
Credit-Default Swaps Sector Graphs: GCDS <GO>
World Credit-Default Swaps Pricing: WCDS <GO>
Biggest Credit-Default Swaps Movers: CMOV <GO>
Top financial news: TOP FIN <GO>
–With assistance from Matthew Leising, Mary Childs, Tim Catts,
John Parry and Shannon D. Harrington in New York. Editors:
Michael Shanahan, Alan Goldstein
To contact the reporters on this story:
John Glover in London at +44-20-7073-3563 or
Abigail Moses in London at +44-20-7673-2
Sridhar Natarajan in New York at +1-212-617-0624 or