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Banks Fall Flat

06 April 2016 by lberuti

The above grapple depicts the evolution of the difference between the 3 year risk premia and the 5 year risk premia of European investment grade companies as a fonction of their 5 year risk premia over the last year. Almost all the pin heads are pointing right which means that 5 year risk premia have been rising over that period, but the most striking feature is the atypical behaviour of the red population, the financials. While all other sectors see their 3 year 5 year curve increase steadily with the level of the 5 year point, financials tend to flatten much earlier or even decrease. During sell off periods, financials' front end risk premia increase faster as market participants reach agressively for protection. They consider the default of certain entities a distinct possibilty - as evidenced by the recent declaration of the German finance minister warning against a watering down of banks failure rules, including a requirement to impose losses on investors -, but they do not necessarily want to pay premium for a long period of time.