The flight out of equities that sent bank stock prices tumbling two weeks ago has in turn given bank debt a rough ride. From senior unsecured bonds to debt that sits lower in the capital structure, the asset class is finally giving up some of the outperformance that has characterised bank capital for the past two years.
The fact that equity market declines are driving the action in the bank debt market means that banks with the biggest exposure to the stock market will be the biggest losers, according to John Raymond, head of European credit research at Lehman Brothers. He says: "Some banks have substantial unrealised gains on equity portfolios â indeed, that has supported their credit ratings. The current slide is going to erode those gains."
