Credit risk continued to flash warning signals last week with financial CDS spreads widening across the board in the U.S., Europe, and Asia. U.S. money center bank swaps were notably higher with Citigroup, Morgan Stanley, and Bank of America all seeing swaps up +5% week-over-week. German banks also flashed hard with Deutsche swaps up +7.7% and the rest of the group up over +5.0% on average. Italian lenders really gapped up with UniCredit and Intesa CDS up +13.6% and 11.0% respectively.
Our heatmap below is more negative than positive on the short and intermediate term and mixed on the long term.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 13 improved / 3 out of 13 worsened / 9 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 6 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged
1. U.S. Financial CDS – Swaps widened for 10 out of 27 domestic financial institutions. Even with Fed minutes showing officials reluctant to raise rates, the median swap rose by 6 bps to 105.
Tightened the most WoW: HIG, MTG, PRU
Widened the most WoW: C, MS, BAC
Tightened the most WoW: LNC, AIG, HIG
Widened the most MoM: JPM, WFC, C
2. European Financial CDS – Financial swaps mostly widened in Europe last week. The median swap widened by 9 bps to 134.
3. Asian Financial CDS – Swaps for Asian financial institutions mostly widened last week, led by Mizuho Corporate Bank in Japan which widened by 13 bps to 110. Meanwhile, all three Indian bank CDS tightened.
4. Sovereign CDS – Sovereign Swaps were mixed over last week. At the extremes, Portuguese swaps tightened by -9 bps to 258 while Italian swaps widened by 11 bps to 136.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Brazilian sovereign swaps widened the most, by 26 bps to 390.
6. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 7.93% versus 7.92% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.0 points last week, ending at 1858.
8. TED Spread Monitor – The TED spread was unchanged last week at 40 bps.
9. CRB Commodity Price Index – The CRB index was unchanged week over week at 171. As compared with the prior month, commodity prices have decreased -1.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 3 basis points last week, ending the week at 1.98% versus last week’s print of 2.01%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China rose 5.5% last week, or 137 yuan/ton, to 2623 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, which is up +51% year-over-year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.
14. 2-10 Spread – Last week the 2-10 spread tightened to 102 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
15. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 41 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT