Debt Ceiling Standoff Propels US Treasury Default Insurance Costs To Highest Levels Since 2009

The cost of insurance against the risk of a United States sovereign debt default reached its highest level since 2009 on Tuesday, as the protracted debt-ceiling impasse continued to keep markets on tenterhooks.

Spreads on U.S. 5-year credit default swaps, which are market-based measures of the risk of an entity's default, grew to 64.37 basis points, effectively implying a 1.09% likelihood of default. 

With barely three weeks left until the government runs out of available cash, insurance against the Treasury failing to pay its obligations on time has climbed by 53.4% over the week, 82.35% over the past month, and 302.3% over the past year.

The iShares U.S. Treasury Bond ETF GOVT closed 0.5% lower on Monday, marking its third straight session of losses. 

Chart: U.S. 5-Year Credit Default Swaps Spike On Debt-Ceiling Impasse

Source and credit: Worldgovernmentbonds.com

What Are Credit Default Swaps (CDS)? Credit default swaps are a form of credit derivative that offer protection against a borrower's default and other risks to the buyer. Investors purchase credit default swaps to speculate on an entity's defaults or to hedge a loan risk. 
If a borrower fails to satisfy their commitments, a buyer of a CDS receives compensation from the seller.

CDS experienced a surge in popularity during the 2008-2009 financial crisis, as traders speculated on trillions of dollars worth of subprime mortgage securities amidst the turmoil. This phenomenon was documented in the movie "The Big Short."

Why Are US Credit Default Swaps Costs Rising? The market is getting increasingly anxious as the impasse continues over raising the $31.4 trillion debt ceiling. 
If Congress does not raise the debt ceiling by June 1, the Treasury would virtually run out of cash needed to meet its short-term obligations, Treasury Secretary Janet Yellen said Monday in a CNBC interview. 

President Joe Biden will meet with House Speaker Kevin McCarthy on Tuesday, but Senate Republican Leader Mitch McConnell has allegedly warned that he will not come to the president's aid on the debt ceiling problem by breaking a partisan gridlock.

Read now: US Stock Futures Slide On Inflation Fears: Analyst Sees Risk-Off Mood As Debt-Ceiling Crisis Looms

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