We keep a close eye on the credit market because it's seen as a leading indicator for the stock market. Within the Financial sector, we track the movement of 5-year credit default swaps (CDS) to measure default risk for the key banks and brokers around the world. During the financial crisis, default risk for the largest institutions hit astronomical levels as the risk of collapse became very real. Since the height of the crisis, CDS prices for the financials have slowly moved lower, but they still have a ways to go to get back to pre-crisis levels.
Below are price charts of 5-year CDS for the six main US banks and brokers going back to the start of 2011. Pricing is in basis points, but it basically represents the cost per year to insure $10,000 of the firm's debt for five years.
As shown, after spiking a little bit in the middle part of the year, default risk is now back to or right near new multi-year lows for all six firms. Wells Fargo (WFC) continues to be priced as the least risky of the group, followed by JPMorgan (JPM) and then Citigroup (C). Bank of America (BAC) 5-year CDS is now just below 100 bps, while Goldman (GS) and Morgan Stanley (MS) are just above 100.
Interestingly, Morgan Stanley is now seen as slightly less risky than Goldman Sachs, which hadn't been the case up until recently.