The normally boring world of big bank credit default swaps is beginning to show signs of life. For much of the last few years, these insurance-based options against bond defaults have barely moved, with rock bottom pricing. This, in turn, indicated that investors were mightily relaxed about default risk. Literally, in the last few weeks, this seems to have changed.
Using the latest December 12th numbers from Meteor Structured Products, we can see that pretty much across the board 1 year and 5 year CDS prices have jumped very substantially. Most of the big banks have seen a 20% increase in pricing with a few such as Deutsche and Credit Suisse experiencing an increase of over 35% over the month to mid-December. By contrast, just one entity, Santander UK saw a decline in the pricing of its 5-year swaps while Royal Bank of Canada and Natixis chalked up very small single-digit increases. For many years HSBC Bank PLC has offered the lowest CDS pricing for 1 year swaps, usually in the single digits. Now that title belongs to Dutch bank Rabobank, whose 1 year swaps are currently priced around 12 basis points – HSBC is up at 20. It’s also worth noting that over the one year timescale, 5 year swaps have shown big increases with most more than doubling in price. Quite what any of us should make about these recent increases is tricky. I’d suggest that investors were too complacent and that current pricing is probably just returning to realistic levels. But the bears could mount an argument for saying that this is another canary in the coalmine of default risk ahead of a slowdown. Whatever your forward view, these rising CDS rates represent good news for structured product buyers – these increased rates will probably result in more generous funding for new products.
|Santander UK||19.12||59.3||-2.38%||41.00%||A –|
|Goldman Sachs Group||33.18||90.85||31.18||67.51||A|
|HSBC Bank PLC||20.43||46.4||4||22.93||AA-|
|RBS / Natwest Markets||53.87||125.46||29.71%||154||A|
|Investec Bank PLC||79||note this is for 5 year CDS rates model implied||BBB|