Credit traders count cost of Xover versus long financials unwind

A rally in European financial subordinated debt did little to ease the pain for traders last month, as the focus switched to regulatory risk around senior bank bonds.

The European Union’s plans for bank rescue regimes have hammered subordinated bank debt in recent months, due to the prospect of debt writedowns. However, successful government bond auctions in Italy, Spain and Portugal saw an change of mood last month. Peripheral European sovereign spreads rallied sharply, with subordinated financial spreads following suit.

“Financials trade on a sentiment basis. It’s not exactly a home run for subordinated bank debt, but there was short covering, with spreads