European CDS Rates Continue to Decline

The cost to insure the senior debt of 25 European banks has fallen 57 basis points so far in January. Credit default swaps (CDS) fell six basis points yesterday to 220 basis. Falling rates indicates that investors are regaining confidence in bank debt.

The reason should be obvious: the European Central Bank’s EURO489 billion injection of cash at an interest rate of 1% has allowed the banks both to boost their own deposits and to buy sovereign bonds with higher yields.

What remains to be seen is how this new confidence will affect purchases of CDS by US banks which have been betting against their European counterparts for some months now.