U.S. President Barack Obama makes remarks on financial reform in the Diplomatic Reception Room of the White House in Washington, D.C., on Jan. 21, 2010. Photographer: Olivier Douliery/Pool via Bloomberg
By John Detrixhe by Bloomberg, January 21, 2010
Credit-default swaps tied to Goldman Sachs Group Inc. and Morgan Stanley rose as President Barack Obama proposed limiting the size and trading activities of financial institutions as a way to reduce risk-taking.
Swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, rose 5.75 basis points to 90.25 basis points, according to CMA DataVision prices. The index jumped 6.2 percent, the most since Oct. 1. An increase signals a decline in investor confidence.
The Markit index rose as Obama called for changes that would add to a legislative package already in Congress. The index reversed an earlier decline because the announcement caused market “uncertainty,” said Rizwan Hussain, U.S. credit strategist at New York-based Morgan Stanley. Swaps have risen for seven days, according to CMA prices.
“The markets are trying to figure out exactly what’s coming from D.C. and the administration,” Hussain said in a telephone interview. “The uncertainty in the financial sector is the reason risk assets are feeling softer.”
The Obama proposals will be part of an overhaul of regulations and would specifically prohibit banks from running proprietary trading operations or investing in hedge funds and private equity funds.
President’s Comments
Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee, said Obama’s comments caused bond investors to move toward safer, lower-yielding investments such as Treasuries and government-backed mortgage bonds.
“The larger financial institutions have traditionally been the first ones to provide capital to invest in a recovering market,” Vogel said. “If this proposal freezes or reduces the banks’ ability or willingness to invest, other investors will pull back until other asset managers step in to take up the slack.”
Contracts on Goldman Sachs rose 22 basis points to 122.5 basis points, the highest since Sept. 10 at 126.5 basis points, CMA prices show.
Swaps on the New York-based lender had fallen to a mid- price of 95 basis points after its quarterly report, according to broker Phoenix Partners Group. Goldman, the most-profitable securities firm in Wall Street history posted record earnings that beat analysts’ estimates as the bank slashed its bonus pool.
“Earnings from the financial sector are bringing the topic of financial regulation back to the focus in D.C.,” Hussain said.
Goldman Debt
Goldman’s 7.5 percent bonds due in 2019 fell 0.6 cents on the dollar to 117.3 cents to yield 5.09 percent, or 150 basis points more than similar-maturity Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The securities were the most traded financial company bonds today, according to data compiled by Bloomberg.
Credit-default swaps linked to Morgan Stanley rose 16 basis points to 133.5 basis points, contracts on Citigroup Inc. increased 11.75 basis points to 189.75 basis points, those on Bank of America Corp. advanced 7.7 basis points to 120 basis points and JPMorgan Chase & Co. swaps gained 12.5 basis points to 65.5 basis points, CMA prices show.
European Index
Contracts on the Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 2.25 basis points to 80, the highest in a month, JPMorgan prices show.
The Markit iTraxx Financials index of credit-default swaps on 25 European banks and insurers rose 1.75 basis points to 83.75, the highest since November. The index is up from a 20- month low of 63.25 basis points Jan. 11.
Credit default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and is equal to $1,000 a year on a contract protecting $10 million of debt.
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