Signs that the global economic recovery is faltering and Europe's fiscal crisis is spreading have added to investor concern that banks will have difficulty in clawing back the $2.4 trillion they're owed by that region's most indebted nations.
The cost of insuring against a default on financial company bonds surged, with the Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 European banks and insurers climbing 6 basis points, to 189, according to CMA DataVision in London. This was near its highest level since March 2009.
The Markit iTraxx SovX Western Europe Index of contracts on 15 governments fell 1.5 basis points, to 167, compared with the record-high 174.4 reached on June 4.
"The market is so volatile right now, it's ready to blow up on any headline no matter how meaningful it should be," said Aziz Sunderji, a credit strategist at Barclays Capital in London. "People are extremely risk-averse."