The cost of buying insurance to protect against Credit Suisse defaulting on its debt hit a record high this week, in a sign of growing concern about the lender’s finances after the failure of two US banks.
As Credit Suisse’s stock and bond prices have risen in recent days, the price of the bank’s linked credit default swaps (CDS) — derivatives that act like insurance and pay out if a company defaults on its debt — has rocketed. The Swiss bank’s five-year US dollar CDS has now topped 1,000 basis points – down from 400 basis points as recently as early March – with similar moves for euro-based contracts.
The rise in the cost of insurance against default followed a series of shocks that weighed on Credit Suisse’s equity and debt, culminating on Wednesday in turning to the Swiss National Bank and announcing a SFr50bn ($54bn) borrowing and SFr3bn debt buyback.
“With [Credit Suisse], it’s been one headline after another for the better part of the last five years,” said John McClain, portfolio manager at Brandywine Global Investment Management. “It’s one thing after another here.”
Credit Suisse’s recent move into CDS also follows the failure of US lenders Silicon Valley Bank and Signature. Ratings agency Moody’s on Tuesday cut its outlook for the entire US banking system from “stable” to “negative” due to a “rapid deterioration in the operating environment”.
Other major banks have also seen their CDS prices rise, but the move has been tempered by moves in the Credit Suisse contract. Five-year dollar CDS for US lender JP Morgan added 15 basis points in the week to Thursday, to 94 basis points, according to Bloomberg data. The same measure of CDS to Citi rose around 20 basis points to 113 basis points.
A five-year euro CDS for Deutsche Bank, one of Credit Suisse’s European peers that has faced its own strains in recent years, rose even more sharply in price, rising more than 70 basis points to more than 160 basis points.
“The recent failure of two US banks has made investors more wary of the sector, bringing ‘problem’ banks under greater scrutiny,” Joost Beaumont, head of bank research at ABN AMRO, wrote this week, citing the “CS situation as a special case” and “banking There is no sign of “widespread weakness” in the sector.
Beaumont added that the “special case” argument is reflected in other banks’ bond spreads widening less than Credit Suisse’s, citing the gulf in yields between bank bonds and less risky government debt.
Single company name CDS are often very thinly traded, which helps to exaggerate market moves. Broadly, “when a company is stressed, their CDS comes under significant stress, but that’s amplified by the fact that it’s a very shallow market”. said a bank credit analyst at a major US asset manager.