CDS Spreads on U.S. Financials Widen Amidst European Crisis

As if the selling in the stocks themselves was not bad enough the cost of insuring debt issued by the major U.S. Banks has been steadily rising since November began. Premiums for a standard 5 year Credit Default Swap on the banks rose sharply over the summer and peak in early October. Today they rose for all the major banks. Morgan Stanley’s (NYSE: MS) risk was sharply higher, rising 15.78 to 467.544 or 3.5%. Trading machine Goldman Sachs (NYSE:GS) was also judged a greater default risk today with premiums rising 2.3% to 369.45 basis points.  By contrast, Bank of America (NYSE:BAC) only saw their credit risk rise 1.77% to 403.41.

For many of these banks these credit spreads have sharply widened as events have unfolded in Europe.  All of the U.S. banks have significant exposure, hedged or otherwise, to the Sovereign Debt of the EU member nations that have dominated headlines, Greece, Italy and Spain.  This exposure has weighed heavily on the sector which has underperformed the broader S&P 500 by 18% in the past year while the nascent economic recovery in the U.S. claws along.  Positive unemployment and housing start data could not overcome fears of default contagion spreading to New York.

A report out of Reuters this afternoon highlighted a comment from a euro zone official who said, “Financial assistance is not in the cards,” for Italy.  Just after this comment was made U.S. Treasury Bonds jumped in price and selling began in earnest on the U.S. exchanges.

Previous Post »  
Tags: , , , , , , , ,
Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

Comments are closed.