21 August 2014 by HCM
US equities are back on the high of the year. In the credit space the picture is mixed. The subordinated CDS on financials are at the tightest level of the year. The new CDS definition schedule for the September roll will make the subordinated CDS “worthless” as useless there were in the Banco Espirito Santo special situation. The CDS moved to the Novo Banco while the subordinated bonds are still sitting at Banco Espirito Santo. The new contract should fit the new resolution regime for distress banks. The over performance of the financial sub is mainly technical, but the TLTRO explains also part of it. At the same time, the Xover Index is still lagging the other indices despite some good news from SunCom (CDS -25bps) today. The Non Dealer/Customer community is still net long protection on the Xover for 4B€ according to DTCC. There is some room to tighten and compress but the investors are shy to add more risks ahead of September where some supply is expected.