After the stress tests told everyone what they already knew about Citigroup, the credit markets get concerned and widen the spread on Citi CDS.

Why? This is not new news.

Is there a threat that Citi might unravel regardless of supervision from the government? That is still a possibility.

I think at this point CDS on banks like Citi are more about controlling VAR or taking a short term directional bet then anything else.