CDS spreads tighten on Tarp repayment promises

Sentiment continued to improve towards US financials today as several major dealers committed to repay loans made by the US government under the Troubled Assets Relief Programme (Tarp).

On June 9, the Treasury granted permission to 10 of the largest financial institutions participating in its Capital Purchase Program - a component of the Tarp in which the Treasury committed to purchasing up to $250 billion of senior preferred shares of qualified financial institutions - to repay a combined total of $68 billion.

The Treasury did not disclose which banks were eligible for repayment, but JP Morgan confirmed today that it would repay the full $25 billion preferred investment it received under Tarp with accrued dividends at a closing time. Five-year senior credit default swaps (CDSs) referencing the firm tightened to 91.6 basis points at 3:15pm BST today from 94.9bp at close of trading in New York yesterday, according to credit information specialist CMA Datavision.

Spreads on Morgan Stanley, which will repay $10 billion in Tarp funds, moved in to 205.1bp from 216.8bp. CDSs on Goldman Sachs, which has received permission to repurchase the 10 million preferred shares bought by the Treasury under CCP, narrowed to 124.8bp from 137.8bp.

CDSs on Bank of America were trading tighter at 165.8bp from 171.3bp, and CDSs on Merrill Lynch tightened to 228.8bp from 239.3bp. Spreads on Citi moved in to 360.3bp from 377.6bp after the firm finalised a public share exchange agreement with the US government, which could raise up to $58 billion.

The cost of credit protection on European banks also tightened today. CDSs on Credit Suisse moved in to 88.5bp from 93.1bp, CDSs on Royal Bank of Scotland tightened to 163.1bp from 170.6bp, while spreads on Barclays narrowed to 132.7bp from 138.2bp. CDSs on emerging markets firm Standard Chartered moved in to 151.6bp from 162.4bp.

See also: US banks' CDSs tighten on permission to repay CPP funds