Credit Suisse bond yields skyrocket

Credit Suisse has a pretty strong capital position — but the markets are behaving as though it doesn't.

Why it matters: When it comes to banking, perception can rapidly become reality.

By the numbers: A Credit Suisse dollar bond maturing in 2024 traded briefly at a yield above 10% on Wednesday. The bank's shares closed at just 4.11 Swiss francs, giving it a market capitalization of just $11 billion, or less than a quarter of its book value.

Between the lines: Credit Suisse's bonds are trading as though they carry a non-negligible chance of default.

• In order for a default to happen, the bank would first have to burn through 37 billion Swiss francs of tier-one capital, 15.8 billion Swiss francs of "contingent convertible" bonds that automatically convert to equity if the bank becomes stressed, and 44.2 billion Swiss francs of “going concern capital.”
• That's almost $100 billion of loss-absorbing capital in total. Credit Suisse might be facing losses and restructuring charges, but nothing of remotely that magnitude.

The big picture: Banks are designed, from their architecture to their marketing, to always seem strong and impregnable. They like to throw around terms like "fortress balance sheet."

• The minute that a bank starts looking weak, its clients and counterparties are prone to move their business elsewhere. That can cause losses which cause even more defections, and so on in a vicious cycle.

The bottom line: Credit Suisse has so far failed to change the market narrative. What it probably needs is a reassuring investment from Warren Buffett.