The Short View: Financials By John Authers
The Short View: Financials By John Authers
Copyright The Financial Times Limited 2007
Published: June 21 2007 18:10 | Last updated: June 21 2007 22:36
Financials are missing the stock market party. The S&P 500 financials index yesterday fell into negative territory for the year, before rebounding late in the day. Beyond the US, according to Rimes Online, the FTSE World Financials index is up only 3.2 per cent for the year in local currency terms – far behind the FTSE World index’s gain of 8.5 per cent.
Why is the sector running out of steam? The boom in mergers and acquisitions continues – and that should help financials. So should the shift in bond markets to a “normal” or steep yield curve.
Ten-year Treasuries now yield more than 20 basis points more than two-year bonds: usually good news for banks, which profit by borrowing at short rates and lending at long.
So why sell financials? As Bill Clinton might have put it, it’s the subprime mortgages, stupid.
The implosion of several US subprime mortgage lenders this year briefly scared the stock market. Optimism that the sector’s problems were contained has faded in the past few days, thanks to problems at two Bear Stearns hedge funds that hold subprime mortgages.
The market in securitised subprime mortgages is illiquid. The incident raises fears that institutions will have to mark down the value of subprime loans on their books, and of contagion or systemic risk. If subprime assets are unsellable, traders might have to sell other, healthier assets. The mere risk of such a scenario was enough to prompt selling of financials - and to push up the spreads payable for higher risk credit.
Further, banks depend less on the yield curve than they used to. Losses in the bond sell-off may matter more.
And some financials dislike higher long-term rates. Real estate, largely bought for its rental yield, goes down when risk-free rates rise. The S&P diversified real estate investment trust index has fallen 20 per cent since January, while FTSE’s UK Reits index is down 15.6 per cent for the year.
Copyright The Financial Times Limited 2007
Published: June 21 2007 18:10 | Last updated: June 21 2007 22:36
Financials are missing the stock market party. The S&P 500 financials index yesterday fell into negative territory for the year, before rebounding late in the day. Beyond the US, according to Rimes Online, the FTSE World Financials index is up only 3.2 per cent for the year in local currency terms – far behind the FTSE World index’s gain of 8.5 per cent.
Why is the sector running out of steam? The boom in mergers and acquisitions continues – and that should help financials. So should the shift in bond markets to a “normal” or steep yield curve.
Ten-year Treasuries now yield more than 20 basis points more than two-year bonds: usually good news for banks, which profit by borrowing at short rates and lending at long.
So why sell financials? As Bill Clinton might have put it, it’s the subprime mortgages, stupid.
The implosion of several US subprime mortgage lenders this year briefly scared the stock market. Optimism that the sector’s problems were contained has faded in the past few days, thanks to problems at two Bear Stearns hedge funds that hold subprime mortgages.
The market in securitised subprime mortgages is illiquid. The incident raises fears that institutions will have to mark down the value of subprime loans on their books, and of contagion or systemic risk. If subprime assets are unsellable, traders might have to sell other, healthier assets. The mere risk of such a scenario was enough to prompt selling of financials - and to push up the spreads payable for higher risk credit.
Further, banks depend less on the yield curve than they used to. Losses in the bond sell-off may matter more.
And some financials dislike higher long-term rates. Real estate, largely bought for its rental yield, goes down when risk-free rates rise. The S&P diversified real estate investment trust index has fallen 20 per cent since January, while FTSE’s UK Reits index is down 15.6 per cent for the year.
posted by Carlos T Mock @ 7:24 PM
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