Go long financial subs and short HiVol, suggest JP Morgan

JP Morgan recommends going short the iTraxx HiVol index paired with a long on the subordinated financials basket of the European index. In a recent research report, the bank notes that recent market weakness has raised the spectre of a double dip recession, and says that more highly leveraged companies will be at most risk in a sell off triggered by concerns over sovereign liquidity.

The current ratio between the sub financials index to HiVol is at its widest ever, with sub fins trading 35 basis points wider than HiVol. JP Morgan says there is value in lower tier two bank debt as a result of declining issuance and the likelihood of bonds being called.

The research suggests buying $100 million protection on HiVol and selling protection on iTraxx Sub Fin in the same amount. As of two weeks ago, that trade would have produced upfront income of $1.6 million.