Japanese banks take a breather but volatility lies around the corner

Japanese banks’ credit default swap (CDS) spreads continued their rollercoaster ride this week, with some of the spreads widening by as much as 40 basis points and tightening back by 30bp. Although Friday’s session brought some solace to Japan’s CDS market, traders warned that participants are still very nervous due to continued uncertainty that spreads could widen further next week.

The cost of credit protection on UFJ Bank dropped to around 193bp on Friday from 220bp a week ago. One Tokyo trader noted, however, that it’s “very tough to put a level” on the CDS. He explained that “because of the [sharp] movements on [UFJ’s] bonds, traders are reluctant to put a level on the bonds’ protection.” UFJ’s share price and bond prices were also battered throughout the week as investors are worried that the bank’s lending portfolio is continuing to deteriorate. There is even speculation that the Japanese government may have to nationalise the bank to save it from collapse.

Sumitomo Mitsui Banking Corporation, which is considered as being safer from Japan’s growing non-performing loans problem, saw the cost of the protection on its credit drop to around 107bp from 125bp last week.

Japan’s CDS market took a breather by Friday, thanks to some positive corporate news in the US that supported stock prices. Computer maker Fujitsu, for example, benefited from a rebound in US computer maker Hewlett-Packard’s stock price. Fujitsu’s five-year senior credit protection stood at 225bp Friday, down from 238bp last week.