Investors in the market for credit default swaps continue to tread carefully when dealing with financial companies, particularly those based in the US, according to data from Credit Derivatives Research.
CDR’s proprietary Counterparty Risk Index - which averages the market spreads of the credit default swaps of the 15 major credit derivatives dealers - remains at “extreme levels”, suggestings investors continue to be wary of the sector. The index ended the week to Tuesday at 155.75bp, 2.3bp wider than its previous close.
Tim Backshall, CDR’s chief strategist, said US financials were perceived to be thrice as risky as their European peers:
Once again European financials outperformed, with their spreads tighter by an average of 8bps (-9.5%), against an average increase in risk among the US financials of 13.2bps (5.1%).
Merrill Lynch was the worst performing name in the index ending up 46 bps (14.9% riskier) as US broker credit risk rose an average of 28bps (10.2%) from the start of the week or, more dramatically, 44bps (18%) from its best levels of the week, as their stocks lost an average of 8.9% over the same period.
US financials (227bps) now trade at triple the risk of European financials (75.5bps) on average as the differential rose 39bps (or 34%) from its lowest levels of the week. Credit Suisse (returning to profit) was the best performer among the CRI names, with UBS (despite ARS legal suits), Deutsche Bank, and BNP Paribas all considerably less risky on the week.
As concerns about systemic risk flared up again late in the week, financials leaked wider from a stronger-than-expected open. With the two most recent TSLF offerings the worst on record, GSE spreads widening, further bank failures, and NAB’s dramatic write-down, sentiment has shifted negatively once more from the midweek euphoria of recent bank results, to solvency concerns at Washington Mutual and book value fears among the US brokers.
