U.S. bank bonds are about the safest on record relative to debt from European financial institutions as a growing economy allows Citigroup Inc. to wean itself off government support and a fiscal crisis roils Europe.
The average cost of protecting the notes of the six biggest U.S. banks including Citigroup and JPMorgan Chase & Co. against default fell yesterday to 12.16 basis points below the Markit iTraxx Financial Index of 25 European banks and insurers. Credit-default swaps on U.S. banks were 341 basis points higher than their European counterparts at the height of the credit crisis in October 2008.
Derivatives traders are penalizing firms in Europe for the bailout of Greece and Ireland while U.S. institutions are benefiting from perceptions the Federal Reserve will succeed in bolstering the economy and financial system. The Treasury Department sold the last of its stock holdings in New York-based Citigroup this week.
“The largest U.S. banks are outperforming European banks,” said Rajeev Shah, a credit strategist at BNP Paribas in London. “The Citigroup unwind, although it does nothing to strengthen the capital structure, is a sentiment booster and should be viewed as positive for U.S. financials. European financials still have the peripheral concerns.”
The U.S. has been winding down bank-bailout and emergency- lending programs introduced at the height of the subprime- mortgage crisis, making a profit of about $12 billion on the Citigroup deal for taxpayers. In Europe, traders are betting lenders will suffer losses on their government debt holdings as the region’s budget deficit problems worsen.
Investors demand an extra 225 basis points, or 2.25 percentage points in yield to hold European bank bonds rather than government debt, the same as for U.S. banks, according to Bank of America Merrill Lynch indexes. The spread on U.S. bank notes was as much as 44 basis points wider than on their European counterparts in October.
Elsewhere in credit markets, the yield premium on company bonds worldwide fell 2 basis points to 173 basis points, after reaching a 12-week high of 177 on Nov. 30, Bank of America Merrill Lynch’s Global Broad Market Corporate index shows. Yields averaged 3.87 percent.
Kellogg Co., the largest U.S. maker of breakfast cereals, plans to sell $1 billion of 10-year senior unsecured notes as soon as today, according to a person familiar with the transaction. Proceeds may be used for retirement contributions and to repay short-term debt maturing through Dec. 13, the Battle Creek, Michigan-based company said today in a regulatory filing that didn’t specify the sale’s size, timing or maturity.
Default Swaps Fall
The cost of protecting corporate bonds from default in the U.S. fell for a sixth day, the longest streak of declines since June. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.2 basis point to a mid-price of 89.75 basis points as of 12:44 p.m. in New York, according to index administrator Markit Group Ltd.
The credit-swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has declined from 99.4 on Nov. 30. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The divergence in U.S. and European bank credit-default swaps mirrors the performance of each region’s economies. Growth in the U.S. will likely be 2.5 percent next year, compared with 1.4 percent for the euro zone, according to the median estimate of economists surveyed by Bloomberg News.
The average cost of insuring Citigroup, JPMorgan, Bank of America Corp., Wells Fargo & Co., Morgan Stanley and Goldman Sachs dropped yesterday to 135.21 basis points from an 11-month high of 198 on June 10, according to CMA. That compares with 147.37 basis points for Markit’s European financial index, which includes swaps on Barclays Plc and Deutsche Bank AG.
U.S. bank debt is historically more expensive to insure against default than European firms. The basket of credit- default swaps on American lenders was 31 basis points higher than the Europe index as recently as Oct. 14, CMA prices show.
“The view in the marketplace is that the de-leveraging process is much further along in the U.S. financial system versus Europe,” said Jason Quinn, co-head of U.S. high-grade trading at Barclays Capital in New York.
Moody’s Investors Service has raised the credit ratings of 37 investment-grade U.S. financial firms this quarter and cut 19, for an upgrade/downgrade ratio of 1.95, the highest since the three months ended Sept. 30, 2008, according to data compiled by Bloomberg. In Western Europe, Moody’s has boosted 5 firms this quarter and lowered 17.
Bailout Winding Down
The U.S. is winding down bank-bailout and emergency-lending programs while trying to recoup the money it provided to bolster companies from automaker General Motors Co. to insurer American International Group Inc.
The Treasury still owns warrants on 465.1 million Citigroup shares, and the Federal Deposit Insurance Corp. holds $800 million of the bank’s trust-preferred securities on behalf of the Treasury, according to a regulatory filing.
Citigroup may post an $11.7 billion profit this year, according to the average estimate of 16 analysts surveyed by Bloomberg, following two years of losses totaling $29 billion. Chief Executive Officer Vikram Pandit said yesterday in a memo to the bank’s employees that “all the elements are in place” for sustained profitability at the third-largest U.S. lender.
Credit-default swaps on Citigroup debt fell to 142 basis points yesterday, the lowest level in more than a month and down from 238 in February, according to CMA. The contracts rose today to 146.5.
Contracts on Bank of America dropped to 189 from a 17-month high of 220 on Nov. 30. Those on Goldman Sachs tumbled to 127.2 basis points from this year’s peak of 228.5 in May, while JPMorgan fell to 81.6 from 134.6 on June 9, according to CMA. Swaps on Morgan Stanley plunged to 168.1 from 305.5 in June and Wells Fargo dropped to 108.2 from 140.4 in the same period.
As the U.S. recovers, Europe’s deficit woes deepen. A crisis in the Irish banking system prompted the government to propose the most austere budget since World War II yesterday, a week after the nation followed Greece in seeking an international bailout.
European finance ministers ruled out immediate aid for Portugal and Spain or an increase in the 750 billion-euro ($994 billion) crisis fund, even as investors bet they’ll be forced to bail out more nations.
“You have a much more uncertain outlook with the European countries,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. That risk will “flow through” to the banking system, he said.