The pricing that the banks have been able to achieve on their limited bond issues contrasts starkly with where their five-year senior CDS are being quoted: these ended the week at 143 basis points. This is more than double the level seen just two months ago.
CDS for the banks usually trades tighter than the spread on an equivalent bond and at current levels are just a few points away from where they were at the start of 2009. At that time, five-year funding in the domestic market was attracting a spread of 190 bps, inclusive of the government guarantee fee.
The CDS spreads for the banks are being driven by events in Europe. Markit commented last week the European banking sector was the credit market's "Achilles' heel". This was based on the observation that Markit's senior financials index for the region was almost back at the record high level of 211 bps seen in early March last year. The index closed on Thursday, 18 months later, at 204 bps.
In March 2009, it was feared that some of Europe's major banks were on the verge of collapse. Now it is the benefactors of the banks that are the cause of investors' worries. This can be seen from the performance of Markit's SovX Western Europe index, which the senior financials index has been clearly tracking since the start of the year, and appears in the chart below.
20100614 CDS spreads pic
For comparative purposes, also included in the chart is the performance of the senior CDS for the ANZ Bank. In this case the ANZ is being used as a proxy for Australia's four major banks, for which CDS prices differ very little.
It can be seen that CDS prices for the Australian banks track the senior financials index quite closely, and while Australian bank CDS prices have not blown out to the same extent as the index they have clearly come under pressure.
This would appear to explain the absence of any significant bond issuance by the banks over the last two months. Any benchmark issuance would most likely be achieved with much wider credit spreads.