Citigroup sub CDS trades upfront, banks weaker

NEW YORK (Reuters) - Sellers of credit protection in the credit default swaps market were asking to be paid on an upfront basis to insure Citigroup’s subordinated debt on Tuesday, traders said, a sign of greater perceived risks at the third-largest U.S. bank.

A Citibank branch is seen in New York February 23, 2009. REUTERS/Shannon Stapleton

Five-year credit default swaps on Citigroup's C.N subordinated debt were quoted around 9.5 percent upfront, or $950,000 in upfront costs to protect $10 million of debt, plus annual payments of $500,000 a year, according to a trader.

The subordinated swaps had closed around 723 basis points on Monday, or $723,000 a year to protect $10 million of debt, according to Markit Intraday.

Credit defaults trade on an upfront basis when the market becomes more worried about distress at a firm.

Citigroup is in talks with federal regulators on a plan for the government to increase its stake, but investors remain concerned about the bank’s ability to absorb losses in a deepening recession.

The cost of protecting Citigroup’s senior debt rose by about 35 basis points on Tuesday to 510 basis points, or $510,000 a year to protect $10 million of debt, according to data from Phoenix Partners Group.

Other bank debt spreads also weakened on concerns that efforts to sure up financial institutions may not support bondholders.

“We can’t blame investors for fearing that the Federal government will allow a major bank to suddenly default on its obligations,” Kathleen Shanley, analyst at Gimme Credit, said in a report on Tuesday.

However, “yesterday’s joint statement from Federal regulators -- with its offer of implicit, though not explicit support -- may be about the strongest statement of support bondholders can expect from Uncle Sam,” she said.

Regulators said on Monday that will begin assessing major institutions’ capital needs on Wednesday under a new “stress test” program that will gauge their ability to weather a deeper recession.

“The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses,” they said in a statement.

Credit default swaps on Bank of America BAC.N jumped 35 basis points on Tuesday to 315 basis points and Wells Fargo & Co WFC.N rose 20 basis points to 270 basis points, said a trader.

JPMorgan's JPM.N credit default swaps also weakened 5 basis points to 180 basis points.

Reporting by Dena Aubin and Karen Brettell; Editing by James Dalgleish