CDS update: Markets stand firm despite declining equities | FT Alphaville

CDS update: Markets stand firm despite declining equities

This CDS report was written by Markit’s Gavan Nolan

Credit markets on both sides of the Atlantic stood firm today in the face of declining equities. The Markit iTraxx Europe index traded at 136.5bp towards the end of the day, some 7bp tighter than Friday’s close. The Markit iTraxx Crossover index traded below 800bp for the first time since November, though the March roll accounts for much of the improvement (Series 10 is still trading over 900bp). The rally was broad-based, with only a handful of names widening. European banks held up well amid uncertainty over US bank stress test results.

As did US banks themselves. Reports that as many as 10 banks will require additional capital unnerved many investors. The consensus leaking out was that six institutions would fail the tests. However, the news was offset by reports that Citi and Bank of America would only have to require another $10 billion in capital. This sum should be within their capabilities. A statement from the White House confirming that it does not expect to go to Congress for more funds provided further reassurance. It is likely that the government will allow its preferred shares in banks to be converted into common stock, thereby boosting tangible common equity.

In the broader market the picture was much the same as Europe, with tightening credit outpacing lacklustre stock markets. The Markit CDX IG index was trading around 157bp, just under 2bp tighter than yesterday’s close. Tightening credits easily outnumbered names that widened.

Markit chart of CDX NA IG and iTraxx Europe