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Takeaway: European fears further recede while the great U.S. yield hunt continues. Big bank swaps place low probability on Brown-Vitter passsage.

Key Takeaways:

* High Yield (YTM)  – Investors continue to discount risk, pushing High Yield rates lower by another 13.6 bps last week, ending the week at 5.53% versus 5.67%.

* European Financials - There are a lot of roses coming up in Europe lately. European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

* U.S. Financials -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Pretty remarkable, when you consider that BofA was at 483 bps on 11/25/11 and that its lows since 2009 have been around 100 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Positive / 7 of 12 improved / 0 out of 12 worsened / 6 of 12 unchanged

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1. American Financial CDS -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.

Tightened the most WoW: RDN, MTG, AXP

Widened the most/ tightened the least WoW: AON, MBI, WFC

Tightened the most WoW: RDN, MTG, AXP

Widened the most MoM: MBI, SLM, MMC

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2. European Financial CDS - European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

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3. Asian Financial CDS - Asian bank swaps were mixed, though modest last week. Chinese banks narrowly tightened, while Japanese banks were mostly wider. State Bank of India was the biggest mover with a 10 bps tightening.  

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4. Sovereign CDS – So much for Cyprus. European sovereign swaps continue to tighten. Italy, Spain, Portugal and Ireland all came in by 9-19 bps week-over-week, and are down 19-50 bps over the past month. Meanwhile, the U.S., Germany, France and Japan all remain a yawn with 1 bp moves.

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5. High Yield (YTM) Monitor – High Yield rates fell another 13.6 bps last week, ending the week at 5.53% versus 5.67% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.5 points last week, ending at 1796.

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7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 22.1 bps.

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8. Journal of Commerce Commodity Price Index – The JOC index was essentially flat last week at 7.48 versus 7.5 in the prior week.

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9. Euribor-OIS Spread – The Euribor-OIS spread remained flat last week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

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10. ECB Liquidity Recourse to the Deposit Facility – ECB deposits were up 5.8 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

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11. Markit MCDX Index Monitor – Last week spreads tightened 7 bps, ending the week at 59.2 bps versus 65.7 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

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12. Chinese Steel – Steel prices in China fell 0.6% last week, or 21 yuan/ton, to 3574 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

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13. 2-10 Spread – Last week the 2-10 spread tightened to 148 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.5% downside to TRADE support.

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Joshua Steiner, CFA