€ Credit Perspective November 2012
October was another supportive month for credit spreads, with our Merrill Lynch generic index tightening by 19bps, an acceleration of the trend experienced over the past few months. Swap spread were rangy, whilst government rates were supportive on the front end of the curve, and the monthly absolute return for the asset class was 1.05%, a slight uptick from last month, leaving the cumulative returns year to date at an impressive 11%.
Performance was more homogeneous across segments than in September, with both core and periphery credit tightening, whilst periphery credit did clearly outperform, tightening by 44bps for the corporates and 29bps for the financials, compared to 15bps and 21bps for the respective core segments. Similarly, subordinated financials did outperform the index during the month, tightening by 57bps, whilst financial senior paper lagged, tightening by a slower 12bps. The coercive subordinated to senior exchange announced by Intesa San Paolo, together with the removal of call options on its outstanding Lower Tier 2 at the very end of the month cooled off the rally, impacting the whole capital structure, but was not sufficient to derail the market performance.
Markets were focussing on Spain, waiting to get answers on the outstanding questions as to when the country would apply for support within the ESM and as to what would be the decisions from rating agencies. Spain disappointed on the first point, not showing sufficient resolve towards a plan, in spite of a on-going weak macro-economic news, whilst S&P surprised negatively with a two notch downgrade to BBB- with a negative outlook, and Moody’s surprised very positively on the other hand, affirming the country’s rating at Baa3, with a negative outlook. This was sufficient to appease markets, which simply wanted to get clarity from agencies, whatever the outcome. The Spanish sovereign curve has been quite resilient as well, as a result of the underlying threat of buying from the ECB, which in turns puts limited pressure on Rajoy to apply for aid, whilst our expectations would be that the market patience could grow thin if no package is approved by the very beginning of next year. In the meantime, Greece was also in the news in a desperate attempt to keep the support from the Troika. The banking union project took a step back, with Germany working on reducing its scope and delaying its implementation.
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