BNP Paribas: US Bank Credit Disconnect?

Credit markets have it more difficult than equities. US banks may, probably, be able to improve their finances, but no credit so far... This is because credit is paid last in US, after shareholders have got their cake?

Here is an excerpt from "Credit Objective" by BNP Paribas today:

It was a day of consolidation for equity markets as US stocks capped the steepest two-week gain since 1938. The 23% equity rally for the S&P 500 off the recent lows has been impressive, but it is the fourth such rally of similar magnitude of the last six months, many of which have been centred around policy developments. Thus far, it has primarily been the equity markets that have shown enthusiasm over the past two weeks that began when Citigroup announced it made a profit in the first two months (ex write-downs) and continued on the back of the Geithner toxic asset plan. It is still early days, and the plan will be put to Congressional scrutiny, although the public portion of the unleveraged investment comes out of the existing TARP fund and thus Congress does not get another vote.
Despite the huge rally in equities on Monday, the volatility index (VIX) could not break the 40 level, suggesting that markets are greeting this rally with a degree of scepticism as buying put option protection is still outweighing. Credit has underperformed equity markets, as the magnitude of the tightening has been very modest in relation to the overall equity market bounce from its recent lows. Similarly, cash spreads have hardly tightened over the past week. Senior and subordinated iTraxx indices have outperformed on the back of the US Treasury news, but cash spreads have shown a muted reaction thus far and US senior bank paper continuing to trade at distressed levels.

Click on chart to enlarge, courtesy of BNP Paribas.