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Financials: Time To Trim Shorts?

20 May 2016 by lberuti

Even if you factor in the roll that took place in March (iTraxx Financial Senior S25 – ITXES25 - is 6bps wider than S24 while iTraxx Main S25 – ITXEB25 - is trading flat to S24), the above grapple shows that financials have massively underperformed the rest of the market since the beginning of the year. In fact, financials are trading at multi-year wides compared with other corporates. Among the ten widest names in iTraxx Main Series 25 (which includes 125 constituents of which 30 belong to the financial sector), seven are banks. While corporates’ risk premia have been dragged tighter by the ECB buying program, financials’ have suffered from the low interest rate environment which is harming profitability, worries around non-performing loans particularly in the periphery and Brexit fears. So much so that some investors decided to book profits on short risk positions on financials over the last couple of days. With buyers of protection on the sector now few and far between, ITXES525 closed almost 5bps tighter at 97bps today and outperformed ITXEB25 (which closed at 78bps) by 2.5bps, while iTraxx Financials Subordinated, which suffers from patchy liquidity, closed 14bps tighter at 210bps.