US govt credit default swaps hit all time high on debt ceiling impasse

NEW YORK: The cost of insuring exposure to US government debt rose to fresh highs on Wednesday, as President Joe Biden and top lawmakers remained deadlocked in talks over raising the $31.4 trillion US borrowing limit.

Spreads on US one-year credit default swaps (CDS) - market-based gauges of the risk of a default - widened to 172 basis points, an all-time high, according to S&P Global Market Intelligence showed, up from a close of 163 on Tuesday.

The cost of insuring US debt against default for five years stood at 73 basis points, up from 72 bps on Tuesday, touching the highest level since 2009.

A protracted legislative fight around the US debt ceiling could lure in panicky buyers of insurance against a government default in coming weeks, as Treasury Secretary Janet Yellen said the government may be unable to meet all payment obligations as soon as June 1.

Due to the mechanics of a potential CDS payout, the probability of a default implied by the CDS could be lower than what current levels suggest, analysts said.

This is because in a potential CDS payout - after a non-payment event is determined - owners of protection typically use the cheapest debt they can find to settle the derivative contracts, and the prices of US government bonds, particularly the long-dated ones, have fallen sharply after the Federal Reserve raised interest rates over the past year.