Press "Enter" to skip to content

Contagion Fears: Wall Street Bank CDS Prices Surge

A spike Wednesday in costs to Wall Street banks for guaranteeing bonds against default is yet another troubling sign of the strains placed on investors by the credit crunch at Credit Suisse and regional banks across America. 

“Credit spreads are telling you there is systemic risk in the system,” said Lance Roberts, chief investment strategist at RIA Advisors.

Spreads for the five-year credit default swaps on JPMorgan Chase & Co. (JPM.N), Bank of America Corp. (BAC.N), Morgan Stanley (MS.N) and Wells Fargo (WFC.N) rose to their highest level since October, according to S&P Global Market Intelligence, while those on Goldman Sachs Co. (GS.N) and Citigroup Inc. (C.N) were the highest since November.

Financial stocks and bonds have lost hundreds of billions in value since SVB Financial Group (SIVB.O) and Signature Bank (SBNY.O) roiled world markets. 

Tech lender SVB, which operated as Silicon Valley Bank, crashed last week after the banks deposit-run led to $42 billion of withdrawals in one day. 

It was the worst since Washington Mutual failed during the 2008 global financial crisis. Credit Suisse Group AG (CSGN.S) fell to record lows Wednesday. 

Its plummeting share price has intensified concerns among investors over the sustainability of the world banking system.

Five-year credit default swaps on Switzerland’s top banks hit new records. 

Credit default swaps for Credit Suisse were also reversed on Wednesday, with the two-year rising higher than the five-year, both hitting a new 52-week high, according to data from Ortex.

Some analysts think that large banks are sustainable, while they are more concerned about smaller to medium banks. 

“Credit default swaps on various large U.S. banks have been creeping up lately, but they are still nowhere near levels seen during the financial crisis,” said Ryan Detrick, chief market strategist at Carson Group, adding that while cracks are forming, the large banks are still in solid shape.

Another measure of bank distress, the so-called 6 month spread of the Federal Reserve’s funds rate-to-interest rate ratio, spiked on Wednesday to 39.89 basis points, the highest reading since November. 

Widely seen as a proxy for the risks of the banking sector, it measures the spread between three-month U.S. forward interest rates and overnight swap rates for the indices.

A higher spread reflects increased risk in interbank lending. The yield spread for the BofA US high-yield index ICE (.MERH0A0), the widely used benchmark for the junk-bond market, rose above 500 basis points for the first time since October at the end of Monday, though fell to 474 bps by the end of Tuesday. 

Monday’s 42-basis-point increase was the biggest one-day increase since early in the pandemic, in June 2020, and is yet another sign that a crater is developing.

The final effects from a systemic shock are not fully understood yet by investors, said Jason Benowitz, a senior portfolio manager at CI Roosevelt.

0 0 votes
Article Rating
Notify of
Inline Feedbacks
View all comments
Would love your thoughts, please comment.x