Counterparty risk rises despite financials volatility, says CDR

Credit Derivatives Research says that counterparty risk has risen slightly over the past week despite significant volatility among many financials. Falling oil prices spurred an early week rally across most risky assets, dragging financials tighter, but concerns over a global slowdown combined with further rumours of asset sales and write-downs among US brokers saw spreads weaken. Friday saw the CDR Counterparty Risk Index (CRI) reach almost 166bp, the highest level of risk in almost two months before the rumours began on Fannie Mae and Freddie Mac.

The conservatorship nature of the GSE plan triggered their CDS contracts but cash spreads rallied exceptionally, notes CDR. Financials rallyied in concert with all fifteen members of the CRI dramatically tighter at the open on Monday. The CRI reached as tight as 146bp intraday, its lowest risk in a month, before sentiment slipped and the CRI closed at 154.2bp (2bp riskier than last week). CDR says systemic risk dropped considerably late last week as senior tranches rallied despite spreads widening, perhaps implying tranche traders front-running the potential bailout of the GSEs.

Financial stocks considerably outperformed CDS on the week as rumours circled the major US banks and brokers. European names tightened on the week by an average of just under 2bp while US financials risk rose by over 5bp on average (despite dramatic rallies yesterday).

Goldman Sachs and JP Morgan were the worst performers among the CRI members with the former wider by 11.5bp (7.8% more risky) and the latter wider by 6.25bp (5.71% riskier). All European financials in the CRI were tighter expect HSBC, which edged wider but the Europeans saw the largest ranges in their spreads with BNP Paribas, HSBC, Credit Suisse, and Deutsche Bank all trading over 15% from high to low over the week (compared with 3-7% swings in US financials on the week).