With investors increasingly concerned over the outstanding debt in the secondary market, they are now demanding higher risk premiums, which is costing Citigroup a lot more money for its credit default swaps.
A credit default swap will pay the one buying it face value if a borrower defaults on the debt. They receive the cash equivalents or underlying securities which collateralized the debt.
When a basis point increases, that means the cost of credit swap defaults go up, as a basis point represents 0.01 percent point, the equivalent of $1,000 a year to protect $10 million worth of debt.
That means as of the last quote for Citigroup credit default swaps, it stood at 205 point, up from Wednesday’s level they closed at of 195 basis points.
As are result of that increase in basis points, Citi will now have to pay $205,000 for every $10 million five-year senior bonds of the bank. That’s very expensive, and other financial institutions like Goldman Sachs (NYSE:GS), are even higher than that, standing at 215 basis points; up from Wednesday’s close of 190.
I think the reason for the fear is the conflicting economic reports and actual real-world circumstances, which have been conflicting with one another, causing investors and the markets to cease up some, and when there is uncertainty and resultant fears, the outcome is always a run for safety, or demand for more safety, which is what is driving up the cost of credit default swaps for Citigroup and others.