The relationship between financial and non-financial credit – decoupling?

By Stefan Isaacs

A renewed focus on European bank balance sheets, their sovereign exposures, fears of creditor bail ins and a general risk apathy saw subordinated financials spreads move significantly wider through November. I’ve charted the ratio of spreads, comparing the Merrill Lynch EMU Financial Corporate Index, Sub Type (EBSU) against the EMU Corporates, Industrial, BBB rated (EJ40) below. Whilst sub financial spreads are still somewhat tighter than levels reached in June 2010 ( +466 vs +519), the relationship between financials and non-financials has moved back to levels not witnessed since the end of 2009.

 

Where does this relationship go from here? Is a ratio near record wides sufficient to entice investors back into subordinated financials ?

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

Job Title: Deputy CIO Public Fixed Income

Specialist Subjects: Bonds

Likes: Football, travel and the prospect of retirement

Heroes: Sir David Attenborough, Bill Shankly and Theodor Herzl

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