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Commerzbank View On iTraxx SR Financials and iBoxx Banking Spreads

FINANCIALS SECTOR

  • iTraxx SR Fins tightened significantly in Q423, outperforming cash and making for an attractive overlay hedge. In cash, Preferred is historically cheap, while Subordinated is now expensive, though they still see Bail-In as more appealing due to the spread on offer. Commerzbank views these recent moves as inconsistent though the results season is unlikely to trigger RV changes.
  • They argue that the SR Fins relationship with the Preferred and Bail-in cash bond indices is puzzling, particularly the 40bp swing in relative value driven by CDS movements. The difference in loss triggers between senior cash classes and CDS is not sufficient to explain this, nor is any potential scarcity of cash at institutional investors.
  • Differences in the composition and duration of indices, such as the inclusion of US names in Bail-in and insurance in SR Fins, have also not significantly impacted their performance. Insurance and bank subordinated indices traded largely parallel.
  • Cash now appears cheap relative to Senior Financials, especially the Preferred index, which is at its cheapest compared to the last five years. The market expects some change in relative values as the January supply glut slows down and banks enter a quieter period before releasing results.
  • Subordinated debt is now expensive in relative terms, with the gap between Subordinated and Bail-in indices at around the average level of 65bp since 2018, but tight relative to the last two years.
  • Bail-in is seen as more appealing now, having widened recently. With the easing of issuance pressure for subordinated MREL-eligible debt, 2024's issuance is expected to focus on refinancing needs or modest organic RWA growth.
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