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Bank Bonds Bucking The Bullish Stock Trend

Tyler Durden's picture




 

As the financials ETF, XLF, jumps from down 1.25% to up over 0.75% today, we note that credit markets for the major US banks are anything but exuberant. In the short-term, US bank credit remains significantly weaker, having broken its trend on February 9th, than the broad ETF or individual bank stocks would suggest. We have seen European credit spreads for banks come back off their worst levels - and at the same time, bank stock prices revert downwards to meet that depressed credit perspective. In the US, stocks remain euphoric and credit has not staged any comeback yet inferring a 5-6% drop in XLF (or rally in credit of course). Perhaps the USD-denominated nature of stocks is 'mispriced' relative to the risk-denominated nature of credit spreads as liquidity floats all risk assets on hope of LTRO2 et al.

 

The upper pane shows US bank stocks (XLF ETF) and an index of the six largest and most liquid US bank CDS (inverted). The higher the credit spread, the more risk, (lower in the inverted chart) and we are nearing the worst levels in six weeks while stock prices are near their highs.

The lower pane shows European credit has retraced and so have stocks from their best levels - but stocks remain 'expensive' relative to credit still (though if we split these into LTRO and non-LTRO banks the difference is greater).

 

And looking at each of the individual members of the US credit index - it is clear that there is little to no compression in risk in the last week or two as stocks have pushed higher. JPM and WFC appear to have performed the best in credit recently but still the moves are well off recent tights. Its also worth noting that some specific stocks such as BAC and MS are tracking their 200DMA down gradually but unable to break below it for now.

 

Of course the safest trade is to sell credit protection and sell XLF (or the individual stocks/vol) looking for convergence, but with such large events pending and the over-extension more broadly of equity markets over credit in the last month (post NFP), the odds favor an XLF retracement to credit in the short-run.

Charts: Bloomberg

 

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Mon, 02/27/2012 - 15:33 | 2201320 GeneMarchbanks
GeneMarchbanks's picture

#BTFL (the 'L' is for Levitation, the 'O' is for the...)

Mon, 02/27/2012 - 15:48 | 2201373 idea_hamster
idea_hamster's picture

"[T]he safest trade is to sell credit protection and [insert anything here you think may hedge your risk]"

Um ... what?  Or in other words, "Um ... WTF?!?"

I gotta say, I'm going to have to disagree unless you're Ben!

Mon, 02/27/2012 - 15:35 | 2201324 lolmao500
lolmao500's picture

Let the shit hit the fan :

http://the99spring.com/letter.html

The choice is in our hands. This spring, we will act on that choice and rise up in the tradition of our forefathers and foremothers. We will not be complicit with the suffering in our families for another year. We will prepare ourselves for sustained non-violent direct action.

NDAA goes live in a week or so. Shall be interesting.

Mon, 02/27/2012 - 15:38 | 2201329 Silver Bug
Silver Bug's picture

The credit markets are plain and simply oversaturated. This is the biggest bubble in history.

 

http://jimrickards.blogspot.com/

Mon, 02/27/2012 - 15:44 | 2201356 SheepDog-One
SheepDog-One's picture

Its all gonna Hindenburgh soon enough.....OH the HUMANITYYYYYYY!

Mon, 02/27/2012 - 15:45 | 2201365 marketblip
marketblip's picture

Looks like credit markets are waiting to catchup. Look at the italian bond yields fall today.

www.marketblip.com

 

Mon, 02/27/2012 - 15:48 | 2201376 kralizec
kralizec's picture

So, betting on SKF could pay off.

Mon, 02/27/2012 - 15:52 | 2201383 Everybodys All ...
Everybodys All American's picture
ISDA to make decision on Greece CDS triggers by 1700 GMT, Wednesday February 29 according to FT Alphaville

and then what?

Mon, 02/27/2012 - 16:02 | 2201419 vote_libertaria...
vote_libertarian_party's picture

Before the PSI vote is in.

I will be SHOCKED if they trigger those contracts.

Mon, 02/27/2012 - 16:52 | 2201573 Schmuck Raker
Schmuck Raker's picture

It's a non-story...

ISDA to make decision on Greece CDS triggers by 1700 GMT, Wednesday February 29 according to FT Alphaville

According to FT Alphaville, The International Swaps and Derivatives Association, Inc. (ISDA), as secretary to the Determinations Committees (the DCs), today announced that a question relating to the Hellenic Republic has been submitted to the EMEA Determinations Committee.

In accordance with the Determinations Committee process, the EMEA Determinations Committee will decide whether to accept the question for deliberation or reject it and this decision will be made by 5PM GMT on Wednesday, February 29, 2012.

 

[full article: http://ftalphaville.ft.com/blog/2012/02/27/899511/isda-greece-credit-eve...]

...so they can ignore the issue altogether.

Mon, 02/27/2012 - 15:53 | 2201386 Shizzmoney
Shizzmoney's picture

The bigger they are.......

Mon, 02/27/2012 - 16:30 | 2201493 Robot Traders Mom
Robot Traders Mom's picture

The harder to let them fall?

 

-Hank Paulson

Mon, 02/27/2012 - 16:23 | 2201474 realtick
realtick's picture

Anyone else think Morgan is the next Lehman? That stock is in bad shape:

http://chart.ly/evbpsdb

 

Mon, 02/27/2012 - 16:25 | 2201479 BlandJoe24
BlandJoe24's picture

Hi, What if any effect do you think the LTRO2 announcement will have on EURUSD?

Mon, 02/27/2012 - 17:40 | 2201763 Overdrawn
Overdrawn's picture
Lord James of Blackheath $15,OOO,OOO,OOO,OOO FRAUD EXPOSED February 16 2012

 

House of Lords video accusing USA of massive fraud in league with the banks.

 

http://www.youtube.com/watch?v=eL5hqvTWkYg&feature=player_embedded#!

Mon, 02/27/2012 - 19:42 | 2202097 rapier
rapier's picture

My long term forecast is that bank debt, and corporate, will cross under, in yeild, Treasury debt and then the banks and corporaations can in essence become the source of money.  Money will be privatied/corporatized. It's a delicate game getting there but getting there we are.  

 

Sooner or later the banks will pull the plug on more government borrowing and will dictate the budget down to the last dot of the "i". In which case government will devolve in a self reinforcing spiral down and bank/corporate debt, and equtiy, will be the new standard of value. 

 

In 10 or 30 years if you are around you will be kicking yourself for not going all in with the giant banks and corporations.  If history does not go in the general direction I am proposing then it won't make any difference what you invest in for there will be a general breakdown.

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