30 June 2017 by lberuti
While volatility made a timid come-back this week in the credit market, it was nothing compared with what experienced interest rates. As far as credit is concerned, the main take-away of the week is once again the outperformance of the financial sector compared with the rest of the market. And once again, they benefitted from a “technical” tailwind. Last week it was the change of inclusion rules in the iTraxx Financials index - going forward it will reference bank Holdco rather than Opco to better reflect the capital structure – that gave UK and Swiss banks a boost. This time it came from articles in the press suggesting that the Italian government would be fast tracking the Non-Preferred Seniority (NPS) into the creditor hierarchy via legislation, potentially as early as July. Such type of debt ranks lower than senior debt. Thus, when it is issued, it makes senior debt even more protected. Furthermore, if the example of French banks – which can already issue such NPS debt – is any guide, it will mean that the issuance of senior debt will drop significantly, substantially impacting hedging needs. In the above uniformly pale grapple, only 3 bright green boxes stand out : they correspond to ISPIM ( Intesa Sanpaolo SpA ), UCGIM ( UniCredit SpA ) and BACRED ( Mediobanca ). Over the week, these three banks saw their risk premia tighten respectively by 13bps (at 89bps), 17bps (at 90.5bps) and 25bps (at 102.5bps).