Bank CDS Spreads Narrow -- C Still On The Hot Seat ~ Steve Blitz Morning Notes
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Wednesday, April 15, 2009

Bank CDS Spreads Narrow -- C Still On The Hot Seat

As the accompanying chart reproduced from Bloomberg illustrates, the news about bank earnings in the first quarter have narrowed CDS spreads from their recent wides at the end of March but they are still wide. JPM, priced as the best of the bunch, is at 174bp in from 216bp on Mar 30 but still quite a bit wider than the 111bp spread on Feb 9 -- its narrow for the year. C, the perceived weakest bank, was at 262bp at the beginning of Feb, widened to 666.6bp on Apr 1 and has since narrowed to 568bp. WFC, the big profit earner for Q1 is at 241.4bp from a wide of 312.5bp on Apr 1 but its projected earnings have not brought the spread back to its narrow of 128.8bp on Feb 9.

Equity prices for banks have performed better than the default spreads in recent weeks. One could argue that the equity valuations got too pessimistic and were ahead of the debt markets and this is a bounce back. Perhaps we can call CDS and equity prices in line today, perhaps not, but we can say that the all the talk of Q1 earnings and passed stress tests still has the market plenty worried about default, and worried about C most of all.

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