US financials outperform Europe as counterparty risk falls sharply, says CDR

Credit Derivatives Research reported yesterday that counterparty risk among major financial institutions fell almost 40% week-to-week. The CDR’s counterparty risk index was 132bp tighter to 213bp, its lowest in more than a month.

Credit markets outperformed equities dramatically with the CRI members stocks up on average only 10%. US financial credits outperformed Europeans with a drop of over 46% and 29% respectively as US banks (risk down 53%) were the major winners on the week. The US brokers also rallied significantly with an average reduction in risk of more than 50%, albeit leaving Morgan Stanley by far the widest trading name in the index at around 430bp (compared to Goldman Sachs at only 200bp).

European financial spreads remain considerably lower than the US (85bp and 330bp respectively) but the differential has compressed significantly this week (almost 40%) as the CRI members shift from 20% trading under 100bp a week ago to more than 50% currently. BNP Paribas remains the tightest trading name in the index at 50bp, having tightened by over 20% this week while Morgan Stanley (having received the MUFG and CPP injections) vies for best performer with Citi (both tighter by around 60%).

CDR says the recent cash-CDS contraction should bode well for basis traders and will likely provide a much needed fillip for the corporate bond market’s liquidity, as relative-value trades can once again be placed but we see the best value in the market in placing 2-5 year steepeners on the members of the CRI as a bet on short-term governmental support being overwhelmed in the medium-term by ongoing capital needs.