The cost of protecting US banks against default rose sharply on Tuesday afternoon UK time as investors in both equity and credit markets showed renewed signs of skittishness over the durability of bank earnings and over the upcoming results of the US “stress tests”.
Bank of America and Citigroup - both of which reported better than expected earnings in the past week - each saw their cost of protection leap sharply ahead of the opening bell of the New York Stock Exchange. BoA was 30 basis points wider at 305bp, according to brokers Pheonix Partners, while Citi was 50bp wider at 635bp.
In Europe, the widening trend that began on Monday continued to gather strength with banks and insurers seeing big rises in their costs of protection. Swiss Re, Aegon and Aviva were among the biggest movers, with their credit default swap spreads up respectively by 31.75bp to 522.50bp; 19.58bp to 382.50bp; and 17.09bp to 330.00bp.
The main indices of CDSs, which provide a kind of insurance against non-payment of corporate debt, were also wider as stock markets saw a second day of declines. The main iTraxx Europe index of investment grade bonds was 5.35bp wider at 160.6bp - a second day of gains and a sharp reversal of the declines seen since the start of April - meaning its now costs €160,600 per year to insure €10m of the index against default. The US CDX investment grade list was similarly 5.71bp wider at 192.63bp.
Commerzbank, Deutsche Bank, Credit Suisse, Royal Bank of Scotland and Barclays Bank were all wider by between 9bp and 12bp.
