Is Now the Time to Trust Eurozone Banks?

(January 28, 2014) — Confidence in the Eurozone is rising among credit investors, leading some to even consider investing in the banking sector again.

Natalie Trevithick, head of investment grade credit at Payden & Rygel, told journalists that, following the decision to invest in UK and French banks in 2013, this year had seen her “dip her toe” into Italian banks.

Financials had experienced wider credit spreads than industrials in 2013: a trend which Trevithick thought would continue in 2014, reflecting the views of Morgan Stanley Investment Management, which last week also stated it found financials more attractive in the short term.

Unlike in the US, where the banks have fully delivered and are therefore a “less compelling” investment case, according to Trevithick, those in the Eurozone are only just seeing deposits begin to overtake loans.

One such bank invested in by Payden & Rygel was Intesa Sanpaolo. The fund manager found this bank attractive because it has a conservative loan book, and provided good opportunities on the credit default swap market and in dollar-denominated trades.

The bank is a “substantial” holder of Italian gilts, which Trevithick admitted could be seen as a concern, but she remained confident that the sector had the backing of the European Central Bank (ECB), which “means it’s worth taking the carry”.

Outside of Italy, bank loans are being seen positively by Payden & Rygel, particularly when compared to the high yield market.

Brad Boyd, a portfolio manager for core bond and absolute return strategies at the firm, said: “High yield pays out more, but the benefits of bank loans are you’re higher up the capital structure, and it’s has a floating rate note coupon. We’re willing to give up a bit of yield to be higher in the structure and have that coupon.”

As a firm, Payden & Rygel remains positive about high yield bond performance for 2014 and remains overweight in high yield across its core bond accounts, but believes the returns will be more likely to be comfortably mid-single digits, rather than some of the double digit returns seen in 2013.

Separately, ING Investment Management International said today it believes spreads will tighten as investors continue to buy credit-sensitive strategies in favour of interest rate-sensitive strategies, but that credit would remain attractive for investors.

It also agreed that investors were confident that the ECB would remain supportive, benefitting European credit as a result.

Payden & Rygel’s Boyd added that the firm had “played selectively” in the collateralised loan obligation market, although he remained cautious about the products.

In addition, the new agency risk sharing deals of the US housing market—where investors can invest in structured Fannie and Freddie debt based on the metrics of an underlying pool of mortgages, but in the event of defaults the investor takes some of the hit—were proving to be attractive, he said.

Related Content: Morgan Stanley: Look to Financials for Fixed Income Opportunities and 2014: A Good Year for Illiquid Credit?