Congratulations, markets: Paul the psychic octopus probably has a better handle on the future right now.
That, at any rate, was the implication of Barclays Capital’s European Credit Alpha note on Friday, which invoked Paul — who has successfully, if inexplicably, called every German win in the World Cup — to underline the epistemic uncertainty of 2010′s second half.
As Aziz Sunderji and team wrote (our emphasis):
If only European credit investors had their own prescient cephalopod. They might ask it if pan-European regulators will stress bank balance sheets for losses on government debt and how potential recapitalisation takes place. Perhaps they would ask it how banks will fund the €1.5trn in senior debt coming due in the next 2.5 years. We expect these and other questions to be only gradually addressed over the next quarter, and while realised spread volatility and bond market liquidity are at unappealing, late-2008 levels, we believe spreads are unlikely to tighten meaningfully in the near term.
In particular, here’s an interesting bit on Spanish bond auctions, which have become something of a barometer for Europe’s sovereign debt crisis — wrongly, perhaps, as BarCap think they’re too opaque. Bid-to-cover ratios in the auctions don’t reflect the souring appetite for risk represented in CDS on Spain, they argue:
Well — latter Spanish auctions have coincided with an ECB bond-buying programme. It’s also worth pointing out that banks’ CVA desks may be pushing sovereign CDS up as they try to hedge increasing counterparty risk in Europe’s crisis. Which makes this all even harder to read.
But liquidity in Europe’s bond markets has indeed regressed to late-2008 levels — or if you’re more optimistic, it’s rowed back on a rally that started in 2009:
At any rate, this does suggest a turning point.
In which case, BarCap still don’t think banks will be on the right side of it:
As real money investors eventually return to the market, we believe they will favour insurance bonds over banks. Whereas banks have €1.5trn euros in senior debt maturing over the next two and a half years, insurers have only €22bn. Moreover, investors remain concerned about bank balance sheet opacity with regard to peripheral government exposure. Many insurers on the other hand have voluntarily disclosed relatively healthy balance sheets. Finally, while insurers have outperformed banks in the CDS space YTD, valuations in the T1 space – where they have underperformed banks – are more compelling.
The insurers shall inherit the earth. Although let’s ask Paul first.
Related links:
Charting Europe’s grim sovereign-bank loop – FT Alphaville
The price (and cost) of bank funding in Europe - FT Alphaville