The bonds are rallying and the price on credit default swaps is coming down. But both are still at less than healthy levels, perhaps indicating that the market doesn’t believe this is the end of our long national(izing) nightmare.
Citigroup’s senior bonds are performing better, with estimates on the drop in risk premiums over comparable Treasury yields ranging from 15 basis points to 20 basis points. But, the risk premium on a five-year note due 2014 is quoted at 950 basis points, a decrease by 180 basis points, according to a bond trader.
The annual cost of protecting Citi’s senior bonds against default for five years – a key gauge of creditworthiness – dropped by $25,000 to $370,000, according to broker Phoenix Partners Group. The cost was as low as $360,000 earlier Friday.
The annual cost of protecting the riskier subordinated debt slipped by about $ 129,000 since Thursday to about $610,000, according to data from Phoenix Partners Group and Markit. The costs had on Tuesday reached levels usually seen for distressed companies before falling, albeit to still-elevated levels.
But several market participants said they were still digesting the news. Prices on preferred securities are “all over the place,” said another bond investor. Bank hybrids have weakened recently amid speculation over the government taking larger stakes in banks. Traders estimate that hybrids, which vary in key ways such as the ability to accrue missed dividends, generally have lost between 30 and 70 basis points over the past few weeks.
Citi has said it will suspend dividends on its preferred shares, while it will continue to pay the dividends on trust preferred securities and enhanced trust preferred securities. However, holders of these hybrids may be eligible to swap them into common stock.
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