Credit swaps for Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) rose in May, with swaps for Goldman increasing 3.9 basis points to 170.8 basis points, and Citigroup swaps grew 2.7 basis points to 173.4 basis points.
Buyers of credit swaps are paid the face value of the instrument if a borrower doesn’t pay what they owe, minus the value of the debt they default on. Annually, a basis point is valued at $1,000 on a contract which covers $10 million of debt.
The overall corporate credit risk surged in May too, rising to its highest levels in 15 months.
Most of this is in relationship to fears over how deep and long the European sovereign debt crisis may be and last, and what type of effect that will have on their ability to refinance. Concerns over the impact on global and regional economies is another major factor in the mix.
The behavior of the index is it will normally fall when investor confidence rises and rise when confidence falls, as it is now. The rise in the index this month is the most since February 2009.
Consequently, corporate bond sales have plunged to their lowest level in a decade, as the possibility entire nations may default on their debt weighs on the markets.
