Pragmatic Capitalism

Capital for Living a More Practical Life


By Rom Badilla, CFA –

After last week’s short covering amid ECB intervention, the Euro is back to its underlying downward trend today. After the news of a failure of a Spanish bank, the Euro tumbled in early morning trading giving back close to half of its 2-day rally. After reaching an intraday low of 1.2144 on May 19, the Euro rallied back early Friday to a high of 1.2672, an increase of 4.4 percent. With little development in addressing the crisis over the weekend, the Euro has declined this morning to a low of 1.2345. Currently, the Euro is trading at 1.2404, a decline of 2.2 percent from the highs.

Euro 6-Day Intraday Chart

Europe’s banking sector continues to show signs of pressure indicating disruption of money flows due to the sovereign debt crisis. The spread on Credit Default Swaps of the iTrax European Finance Sector, which is the cost to own protection against a default, continues to widen. The spread on 5-Year CDS on European senior finance debt is wider by 4 to 165 basis points in intraday trading according to Markit. The CDS reached an all-time high of 207 basis points in March 2009.

Markit’s iTrax European Financial Senior CDS Spread – Historical Chart

Similarly, the spread on the 5-Year Financial Subordinated CDS is at a mid-market level of 247 basis points, an increase of 10 from the prior close. Comparatively, Markit’s broad based measure, the European Index which covers all sectors of the corporate market, is close to flat at 120 basis points.

The LIBOR-OIS differential, which is gauge of a banks’ willingness to lend, is wider by 2 basis points to a spread of 29.

In the US interest rate swaps market, the yield advantage over US Treasuries which represents bank counterparty risk is also wider. The spread on 2-Year swaps is higher by 5 basis points to 47 with an intraday wide print of 50 basis points.  The wider spread is quite a turnaround as the crisis intensified as the 2-Year swap spreads reached a low of 10 basis points in late March 2010.

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