Continued re-allocation to equity from credit expected at Danske Bank

Danske Bank has said in its latest weekly credit update that it expects re-allocation to continue into equity from credit, despite the benefit to credit investors from ongoing ample levels of liquidity and depressed sovereign yields.

“Should we see a significant uptick in longer dated yields, it is likely to come on the back of an improvement in macroeconomic conditions and the effect on credit on that front would be ambiguous (less attractive to govies in a relative context but a more robust economy would support credit metrics),” the bank wrote.

“We expect spreads to be range bound around current levels, which is likely to result in lower – but positive – returns for the rest of 2013. Search for yield will be a prevailing theme in 2013 and we think the spread tightening potential is largest in the lower rated segments, where the credit risk is more than compensated for by the spread. For senior financials, we are still reasonably optimistic despite the strong rally we have seen.”

“The strong and potentially unlimited backing by the ECB has removed much of the tail risk from the banking sector and the SNS nationalisation once again confirmed the reluctance to impose losses on senior unsecured. Furthermore, European banks are likely to remain in deleveraging mode for some time to come”


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