Five-year protection on Bank of America fell from 79bps in the beginning of December to 70bps (with restructuring) early last week. Bank of America announced early last week it had met reduced earnings expectations for the fourth quarter. It also priced USD3 billion 10-year, fixed rate subordinated note, which was well received in the market, giving protection sellers more confidence in the name. BofA and other financials widened last month as they reduced earnings expectations and players feared a slowing economy would influence the ability of borrowers to pay down loans.
The market has rebounded slightly in financials as the names appear to have overshot fair valuations. Five-year credit default swap spreads tightened almost across the board in the U.S. last week as cash credit markets showed signs of recovery. Although there have been a number of defaults so far this year, the Federal Reserve cut interest rates earlier this month, and may do so again in the near term. The market appears to have priced in the bad news, and is finding a floor, said Joe Breen, v.p. on the credit derivatives desk at Tradition, N.A. in New York.
