Counterparty risk remains at post Bear Stearns wides, says Credit Derivatives Research

Credit Derivatives Research says that its Counterparty Risk Index has relaxed since the intraday wide print of 147bp last Wednesday but still remains over 3bp wider week-on-week at 143.9bp. The index measures the default risk of the dealers that are counterparties in a significant portion of CDS trading.

European banks continued as the worst performers of the week (4.5% wider while US financials were only 1.1% wider) due to weakness early in the week – despite the extra day of trading on Friday 4 July bringing profit-taking that pushed European financials off their widest levels. CDR says that comments by Swiss regulators regarding the capital requirements at UBS and Credit Suisse saw UBS jump wider (+22bp to 139.5bp on the week) and less so Credit Suisse, significantly under-performing the rest of the major CDS counterparties.

US banks modestly underperformed US brokers despite Merrill Lynch and Lehman Brothers ending the week back at their widest since mid-March. Goldman Sachs and Morgan Stanley were range-bound near recent wides as Bank of America and JP Morgan were the worst performers among US financials (with the former under pressure as the Countrywide deal closed and the latter from concerns of the Bear Stearns asset valuations).

CDR notes that dispersion rose slightly on the week as the riskier names widened more than the tightest names in absolute terms, although systemic fears remain high. Spreads of all names have generally tracked wider and are moving closer together, with investors expressing a view consistent with a picture of contagion rather than idiosyncratic issues - despite headlines replete with discussions of clearing house progress.