Goldman: CDS Traders Getting Aggressive On U.S. Banks

Goldman’s Equity, Credit, and Options Market Monitor, part of their cross-product research platform argues that the fixed income market, via credit default swaps, is pushing a bullish case for U.S. financial stocks. Thus they’re part of the recent excitement over U.S. banks from Wall St.:


5 year CDS spreads on the financials sector tightened more over the past week (-5%) and month (-20%) than any other sector. We believe these moves are supportive of a continuation in the Financials equity rally as well as a decline in long-dated financials volatility. PNC, COF, and several regional banks were among the largest tighteners in CDS this week

The concept seems to be that financial equity prices should track perceptions of creditworthiness from the credit default swaps market:


Major movers based on CDS spreads below. Note this piece of research doesn’t carry specific stock ratings, but is rather a more top-down product.


(Via Goldman Sachs, Equity, Credit, and Options Market Monitor, John Marshall, 29 March 2010)

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