The debt market’s mood swings are fast and furious right now.
Traders have turned on European banks, and no one is around to temper their sudden disdain. Deutsche Bank is a prime example this, with a mounting degree of concern about the bank's ability to make coupon payments on its contingent convertible bonds. HSBC and Standard Chartered have also been punished.
Now comes the latest target of credit traders' contempt: Credit Suisse. So far this month, its 6.25 percent contingent convertible securities have plunged almost 14 cents, to 84.75 cents on the dollar, with losses accelerating in the past few days.
The cost to insure against a potential Credit Suisse default surged, based on credit-default swaps tied to the Swiss bank's senior five-year debt.
This is a change from last year, when the bank's euro-denominated bonds eked out a 0.7 percent return and its dollar-denominated notes gained 2.1 percent, even as its stock lost 8.5 percent. Credit Suisse's shares have continued to slide, with prices now at their lowest in 27 years. But now the focus has shifted to the firm's creditworthiness.
Credit Suisse certainly faces some extreme challenges. It, like Deutsche Bank, has new leadership, with former Prudential PLC CEO Tidjane Thiam offering a new approach at the helm of Switzerland's biggest lender. In October, he announced a plan to shrink the investment bank and build its wealth-management business. On Wednesday, he made the uninspiring statement, "It's not a great time to be a bank.''
It's hard to argue with him there. But does all this translate into a greater risk of insolvency, or an inability of financial firms to repay debt? That seems unlikely in the near term despite the market's heavy-handed treatment. Remaining solvent and posting big profits are two different things, albeit linked at their extremes.
Let's just speculate, for a minute, about this scenario: A big investor wants to sell a bunch of its financial debt holdings at market value and can't find a buyer. So it has to lower its price. That ripples across the market. Debt traders worldwide suddenly face lower valuations and have to reassess their own holdings. Because they, too, probably own a lot of financial debt, they won't be buyers and, eventually, could join in the selling. Absent any apparent changes in fundamentals, wouldn't that explain the sudden convulsions around Deutsche Bank and, a few days later, Credit Suisse?
More than a statement of banks' health, the fast deterioration in Credit Suisse's perceived creditworthiness suggests more landmines to come in debt markets. It won't take much to set off another downward spiral. All it takes is a big seller, an absence of buyers and a market searching for explanations for the market's increasing weakness. Like most landmines, the where and the when lurk treacherously below the surface.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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