In a recent Citi report from strategist Robert Buckland we weren’t surprised to see that Europe’s Credit Default Swap spreads have expanded the fastest of any region, since January 1st. An expanding spread shows declining investor confidence in a nation to pay its bonds.Robert Buckland @ Citi: The most immediate fiscal concerns are within the Euro Zone. This is where we have seen the biggest percentage increase in the cost of insuring against default since the start of the year (Figure 4).
Yet we were surprised to see that the U.S. CDS’s have been expanding as well since the start of the year. More so than for the U.K. even. The U.S. is a close second behind Europe:
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Perhaps the U.K. and Japan look so good in the chart above since their horrendous problems were already well priced-in before the start of 2010.
Citi believes the U.S. is still a far less risk than Europe-Ex-U.K. nonetheless, given its historical ability to reduce its debt to GDP ratio and low cost of financing:
“the US has a good historical record of being able to reduce the deficit and debt burden as the cycle turns. Also, the US government still benefits from a low cost of financing as bond yields remain low and demand for US treasuries is robust. Inflation pressures are still subdued and, for the time being, are unlikely to present a significant hurdle for the bond market.”
But clearly the market lost substantial confidence in the U.S. since the beginning of the year, as shown by the CDS spread expansion in the chart above. So something is up, markets haven’t been kind to U.S. developments since January 1st.
Going back to Europe, the CDS spreads below paint a pretty good picture of perceived riskiness by country. Portugal next to re-take the daily headlines?
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(Via Citi, Global Equity Strategist, Robert Buckland, 17 Feb 2010)
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