Worries over the creditworthiness of governments have overtaken fears of a sharp drop in equity markets among European institutional investors, according to Allianz Global Investors’ semi-annual RiskMonitor.

Almost 74 per cent of the 138 institutions, with combined assets of €880bn, surveyed said they regarded sovereign debt as either a “huge” or “considerable” risk, ahead of the 70 per cent similarly worried about a sharp equity market sell-off. This was a reversal of the results of the previous survey in 2011.

Several US banks want to tap the value of the intellectual property holdings of their borrowers as a way of trimming their capital requirements, which are to be made tougher under Basel III rules.

Under the terms of many loans, banks have the right to seize a borrower’s patents and trademarks as part of a foreclosure proceeding. But these intangible assets cannot generally be counted towards the loan’s security for regulatory capital assets because they are considered too difficult to value.

The banks seek deals in which an insurer agrees to buy a borrower’s intellectual property – anything from a mobile phone patent to a logo or recipe – for a fixed price in case of default. 

That price could then be counted against the expected losses, in the same way the expected proceeds from a credit default swap can be used today.Now some banks – faced with tougher safety rules that begin to take effect in January – are exploring whether they can use the assets to reduce their estimates of expected losses in case of a default, in turn reducing the risk weight of the loan and overall capital requirements.

US equity markets are at a crucial juncture. Slowing growth, financial stress and uncertainty are framing the investment backdrop as the second half of the year beckons.

A strong end to June on Friday, saw the S&P 500 retreat 3.3 per cent in the second quarter, with the benchmark up 8.3 per cent on the year, making it one of the better-performing global equity markets since January.

Meanwhile, US Treasuries are ending the second quarter with a total return of more than 3 per cent, according to the Barclays Treasury index. After touching a 65-year low of 1.45 per cent in May, the yield on 10-year notes is closing out June camped at about 1.65 per cent.

The question for investors as the second half of the year gets underway is whether bonds or equities are correctly priced and more importantly how they may react should macro economic fears subside or the Fed is compelled to launch a thrid round of quantitative easing, or QE3.

Moody's Bank Ratings

SWAP Updates

Interest rates are in consolidation mode leaving the 10yr treasury stuck in an ever-narrowing range.  With the Fed done and on hold until the next FOMC meeting on Aug. 1and with the Moody’s bank downgrades proving to be a non-event, the market is once again at the mercy of Europe and the 2-day EU Summit that begins tomorrow.  Investors are cautiously optimistic, but given recent pre-summit statements, even mild optimism seems generous.  German Chancellor Merkel reiterated that Germany cannot be overburdened and said "I fear that at the summit we will talk too much about all these ideas for joint liability and too little about improved controls and structural measures."  On the agenda, Spain is expected to formally request aid to recapitalize their ailing banking sector and also ask the EU leaders to allow bailout funds or the ECB to stabilize financial markets through bond purchases.  Spanish 10yr notes trade perilously close to 7% and Italian 10yr trades firmly above 6%.  Also not unexpected, but the country of Cyprus has become the fifth Eurozone country to seek a bailout due to their heavy exposure to Greece.