The US dealer CDS is showing two general risk categories (clusters). The risky category is BofA, Goldman, and particularly Morgan Stanley. Citi is in that category as well, but the CDS is not as meaningful given the level of US government's involvement with that firm. As worries about BofA's mortgage portfolios subsided somewhat, the CDS tightened to trade closer to Citi and Goldman. Morgan Stanley has been particularly vulnerable when in October rumors circulated about the firm's outsized sovereign exposure. Those turned out to be false (at least on a net basis), but the CDS continues to trade wider than other dealers'. Morgan Stanley is certainly the weakest of the large US dealers from the credit perspective.
The low risk category is JPMorgan and Wells Fargo. Until recently the two traded on top of one another, but this month Wells broke 100 and now trades at 90bp - very tight for a financial firm. JPMorgan is still trading above 100bp.
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| US Dealer 5yr CDS (Bloomberg) |
This current risk clustering is considerably different from what we saw back in 2009 when Citi was the weakest US financial and Goldman was in the low risk category. These are important to track because the dispersion among dealer CDS is indicative of the amount of stress in the financial system.
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