Over the past few months, spreads for credit default swaps (CDS) have widened quite dramatically. This is true for European sovereign CDSs as well as financial institutions, including those for US banks. For example, in September, the five-year CDS spread for Bank of America widened to 228 basis points from 297, and Citigroup's hit 221, up from 204. Goldman's was 227, up from 206.
Some experts believe that these widening spreads are due principally to concerns about the sovereign crisis in Europe, while others believe the phenomenon is a result of continuing mortgage related litigation in the US. Regardless of why CDS spreads are widening, it is critical that issuers and distributors of structured products monitor these developments. These widening CDS spreads are a clear sign of stress on banks, and that the cost of protecting financial institution and government debt against default is steadily rising, causing worry across the global financial markets.