Saxo Bank: cherry-picking financials for better returns than US treasuries

We are now living in a world where banks are sounder and better regulated than before, yet spreads in the financials space are wider than they were before the financial crisis hit, so why are some investors hesitant to put their money into this sector?

To understand whether there is potential for returns in the financial bond market, it is important to compare yields with those in the overall corporate bond market. The above graph displays 10-year yields for US and European investment-grade financial bonds together with the average 10- year yield in the investment-grade corporates. It is clear that during the past year, yields in the financial sector – both in Europe and in the US – have been consistently higher than yields in the overall corporate space, and that the movement of the two has mostly been aligned.

Well-known and established names in the financial sectors, such as JP Morgan, Barclays and Unicredit, pay well above treasuries. For example, if we take senior unsecured issues in USD of these banks, we can see that Citi at 3.887%, 2028, is priced 140 basis points above Treasuries, paying a 3.5% yield; Barclays at 4%, 2026, pays 145 bps above Treasuries, paying 3.8% yield; and Unicredit at 4.625% for 2027 is priced 180 bps above Treasuries, paying 3.9% yield.

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