Wednesday, October 22, 2008

Banks and Brokerages: The Writing was on the Wall

If an equity investor had an eye on credit markets, they would have seen the writing on the wall before the all out financial equity collapse. The cost of borrowing for a AA rated banking and brokerage firm spiked to 50 bps above treasuries from practically nothing from July 27th - September 17th, 2007. Over that same time frame, financial equities (as defined here by the ETF XLF) actually rallied 1%.

Since then, the cost of borrowing for a AA rated banking and brokerage firm has rocketed another 300+ bps above treasuries and financial equities have dropped more than 50%.

Digging a little deeper, comparing the cost of borrowing for a AA rated bank to those rated A or BBB (all Investment Grade), AA's have escaped most of the harm... relatively speaking. Cost of borrowing for A and BBB rated banking and brokerage firms are now both more than 8% wider than the comparable treasury rate.

Before I consider a move back into financials (in the equity market), I'll need to see significant improvement here.


  1. Great post, what is the source for the AA spread data? Is this spread for one maturity or averaged over several maturities? Thank you.

  2. Great job on your blog and another nice post. Please keep updating these two charts.

  3. AA spread is based on an index of 1 year CDS... will keep the updates coming