Counterparty risk dropping dramatically, notes CDR

Credit Derivatives Research has reported that its Counterparty Risk Index (CRI) rallied dramatically this week, dropping to mid-June 2008 levels. The CRI dropped below 100bp for the first time since 19 June, 2008. 

While credit default swap roll technicals may have exaggerated the current market rally, only five of fourteen index members (Royal Bank of Scotland, Bank of America, Deutsche Bank, Citi and HSBC) trade wider than their 19 June, 2008 levels. The CRI still sits above its long term average of 81bp but it has rallied by over 30% since mid-August, by 70% since 9 March this year, when it hit its riskiest level, and by over 65% since the Lehman bankruptcy/AIG bailout.

All CRI members now trade tighter than their 15 September, 2008 levels. Only Deutsche trades wider than its 12 September, 2008 level (the Friday before the Lehman bankruptcy). Goldman Sachs and Morgan Stanley credit risk dropped by almost 75% since a year ago.  Citi, the riskiest name in the CRI, shed over a third of its credit risk since then. While all members of the CRI trade significantly wider than their tightest levels of a few years ago, CDR concludes that the market perceives considerably less risk in these names than even a few months ago.