Morgan Stanley Credit Swaps Fall After Moody’s Downgrades

The cost to protect bonds of Morgan Stanley (MS) from default fell to the lowest level in more than seven weeks the day after Moody’s Investors Service cut the bank’s credit grade less than the ratings company previously said it was considering.

Credit-default swaps on Morgan Stanley declined 26.7 basis points to a mid-price of 354.6 basis points as of 4:25 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since the contracts closed at 352.6 basis points on May 3. Contracts on Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) also decreased. All are based in New York.

Moody’s, after initiating a review of the financial companies in February, announced downgrades on 15 global banks with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue. None of the banks was cut more than the ratings company had forecast and only one bank, Zurich-based Credit Suisse Group AG, had its ranking reduced by the maximum three levels it said was possible.

The Moody’s action “removes a major sword of Damocles that was hanging over the U.S. banking sector,” said Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, referring to an ancient Greek metaphor for the constant dangers that haunt those in power. “The bottom line is markets don’t like uncertainty, and this has clarified where all the institutions are.”

Goldman CDS

Credit-default swaps on Goldman Sachs fell 13.4 basis points to 280.8 basis points, the lowest close since May 7, and Citigroup decreased 14.1 basis points to 244.9, Bloomberg prices show.

Morgan Stanley’s long-term senior unsecured credit rating was cut two levels by Moody’s to Baa1 from A2, Goldman Sachs was reduced to A3 from A1 and Citigroup was downgraded to Baa2 from A3.

“Morgan Stanley was probably the most at risk of a three- notch downgrade, which would have put them right on the verge of below-investment grade,” Thomas Chow, a money manager at Delaware Investments in Philadelphia with about $170 billion under management, said in a telephone interview. “The surprise was that they came in a little better than initially guided by the agency, so that probably helped calm some fears.”

Morgan Stanley’s $2.45 billion of 5.5 percent notes due July 2021 rose 2.1 cents to 99.9 cents on the dollar as of 4:04 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Markit CDX

A benchmark credit-default swaps gauge in the U.S. fell, with the Markit CDX North America Investment Grade Index decreasing 2.6 basis points to a mid-price of 115.4 basis points at 5 p.m. in New York, Bloomberg prices show. The measure declined for a third straight week, slipping 2.4 basis points.

The index, used to hedge against losses on corporate debt or to speculate on creditworthiness, typically falls as investor confidence improves and rises as it deteriorates. Credit-default 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.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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