Investors have been following the default risk as measured by credit default swap [CDS] prices of financial firms since the credit crisis began last year. This cost to insure the debt of banks and brokers has been a telling sign of which firms are in the most trouble and which are weathering the storm the best.
To get a picture of the entire group of banks and brokers, we recently created a cap-weighted index of default risk for 15 global financial firms. Following the levels and direction of this index shows how nervous investors are about the group.
Below we highlight a one-year chart of the Bespoke Financial CDS index. As shown, the index rose significantly but didn't quite get to levels seen in March during its most recent spike. Since the snapback rally that Financial stocks experienced two weeks ago after their 7/15 bottom, the index has declined about 15%, however. Unfortunately, the index is still at very risky levels.
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Disclosure: No current positions in either CDSs nor CDOs.