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Friday
Jun062014

Financial Sector Default Risk Plummets

Default risk as measured by 5-year credit default swap (CDS) prices has fallen significantly recently for the major banks and brokers around the world.  Below are 5-year CDS price charts for the six largest US banks and brokers.  Prices are in basis points, but basically, the number shown represents the dollar amount it costs per year to insure $10,000 of debt against default over the next five years.  For example, it now costs $61 per $10,000 of principle to insure Bank of America debt against default for the next five years.

Default risk for the banks and brokers has been steadily trending lower throughout this bull market, but in 2014 we have seen CDS prices really break lower to pre-crisis levels.  This is an indication that investors are really getting comfortable with the long-term stability and health of the financial sector as a whole.  This is also a phenomenon of the increasing search for yield: credit spreads, another measure of default risk, are steadily falling in other sectors too.