With the return of a risk-off environment, we are relaunching our Risk Tracker to track key risk measures across the various banking systems around the world. 

Note, we plan to publish the RIsk Tracker on a dynamic basis, contingent with evolving conditions in markets, i.e. more frequently during periods of acute stress and less frequently in periods of relative calm.

HEDGEYE FINANCIALS RISK TRACKER

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Key Takeaways: 

• CDOR-OIS widened sharply again overnight, tacking on a further 21 bps bringing the risk gauge to 79 bps up from 14 bps four weeks ago. Canadian bank stocks are reflecting this widening having fallen ~35% from recent highs.    
• US Financials credit default swap spreads widened to an average of 121 bps, up 43 bps overnight. Citi swaps roughly doubled overnight to 200 bps, up from 102 bps yesterday. Historically, we've regarded 300bps as the "Lehman-line", where risk perception can trigger risk materialization. Curiously, while Moneycenter bank swaps are blowing out, swaps of card lenders like Cap One and Amex only moved slightly higher.
• High Yield OAS blew out a further 100 bps on the day to 726 bps, up from 341 bps just four weeks ago.

Our heatmap below is signalling rising risk across most measures on short and medium-term horizons. 

Summary

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1. TED Spread – The TED spread widened by +8 bps (+23%) WoW to 45 bps. Month-over-month, the Ted spread widened by +31 bps (+228%).

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2. Euribor-OIS Spread – The Euribor-OIS spread tightened by -4 bp (-54%) WoW to 3 bps. Month-over-month, the Euribor-OIS spread tightened -2 bps (-32%).

The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

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3. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose +21 bps (+15%) WoW, ending the week at 1.66%. Month-over-month, the Shifon index rose +22 bps (+15%).

The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system. 


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4. CDOR-OIS Spread – The CDOR-OIS spread widened by +36 bps (+87%) WoW to 79 bps. Month-over-month, the CDOR-OIS spread widened by +53 bps (+211%).

The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. 

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5. 2-10 Spread – Last week the 2-10 spread held flat to 35 bps. Month-over-month, the 2-10 spread widened +19 bps (+115%).

We track the 2-10 spread as an indicator of bank margin pressure. 

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6. High Yield (OAS) – Option adjusted spreads on high yield rose +232 bps last week, ending the week at 7.26% versus 4.94% the prior week. Month-over-month, option adjusted spreads rose by +385 bps (+113%).


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7. Leveraged Loan Index  – The Leveraged Loan Index fell -161 points (-7.2%) last week, ending at 2071. Month-over-month, the Leveraged Loan Index fell -206 points (-9.1%). 


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8. North American. Financial CDS – The median North Americans financials swap widened +16 bps (+42%) WoW and +50 bps (+63%) MoM to 77 bps. 

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9. European Financial CDS – The median swap widened +44 bps (+86%) WoW and +59 bps (+186%) MoM to 122 bps.

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10. Asian Financial CDS – The median swap widened +21 bps (+44%) WoW and +32 bps (+80%) MoM to 63 bps.

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11. Sovereign CDS – Australian swaps widened most WoW, rising by +26 bps (+110%) to 51 bps. Spanish swaps widened most MoM, rising by +69 bps (+208%) to 101 bps.

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12. Emerging Market Sovereign CDS – Russian swaps widened most, rising by +137 bps (+155%) WoW and +165 bps (+271%) MoM to 226 bps. 


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Joshua Steiner, CFA

Drago Malesevic