What About the CDS for USA Debt?

Fer-Get-Aboud The Debt Ceiling. Focus on the inversion in credit default swaps on the U.S.A.  As you know, Sovereign CDS typically pay on a credit event which would include a delayed payment. 

Brown Advisory’s Tom Graff ISDA said that a delay on Treasury bonds of more than 3 days would be considered a default, although he says that is unofficial.  Mr. Graff noted the big question is why is it trading “inverted” (i.e., shorter-termed CDS contracts have a wider spread than longer-term contracts)?  A Regular said, “So right now, you can buy protection against the USA at 80bps for 1 year. We know that if we haven’t defaulted in 1 year, odds are we won’t default at all. So if you buy a “cheaper” 5-year contract at 55bps, you’ll have to close out the contract. You assume that the contract spread would have tightened, and therefore you’d have to close out the contract at a loss. By buying the 1-year contract, you just pay the 80bps deal spread and it expires. That’s it.”

FT’s Alpaville noted that Pollack from Markit actually pointed out that the curve has now been inverted for a few weeks, though there’s been a particularly convincing move in the last week.


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