Equity rally prompts tightening of financial spreads

The upswing in equity prices in the second half of the week has prompted a contraction in credit default swap spreads for European banks and insurance companies. But German names, including HVB, were still trading at wider levels for subordinate protection, dealers said.

The cost of protection for financials widened out mid-week. Traders said a surge of selling on the equities market by hedge funds and other speculators generated a wave of negative market sentiment that pushed bids for protection wider. Insurance companies came under notable pressure. Senior credit default swaps widened by 20bp for German insurer Zurich to 225/332bp, and 20bp for Hanover Re to 274/284bp. Both Swiss Re and Munich Re widened 5bp to 70/80bp.

The German banking sector also came

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