The big worry in the debt market right now of course is the Greek tragedy that started with that country's bond (bond market news) debacle and may soon spread to other sovereign debt. That is certainly influencing perceptions of banks right now. I doubt we'll see another bond market meltdown of the scale we just saw with real estate-backed debt. But some think that banks may be vulnerable. If the Greek bond nightmare continues and the entire debt market shudders, this might affect bank holdings of other risky debts, notably subprime-backed bonds.

The Financial Times says this: "Now, the eye in the storm is sovereign debt. But it is too early to shut off the screens that display the ABX index. U.S. banks still hold plenty of mortgage-backed assets on their books. The ABX is a proxy for value of those assets. Any pressure on the financial condition of U.S. banks means they will be likely to sell assets. This would probably include mortgage-backed debt. This would push ABX spreads up. So a rise in these spreads could be the first key sign that U.S. banks are under pressure."

Most people doubt that banks will be hit by eurozone problems significantly. But there are still a lot of subprime-backed bonds in the system, which are still vulnerable.  In general, as more modifications occur, the value of these toxic assets may take a hit.

For more:
- here's the article

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