Traders work on the floor of the New York Stock Exchange (NYSE) in the bell opening on May 27, 2025 in New York.
Timothy A. Clary AFP Getty images
Investors are nervous that the US government can fight for the debt of debt – and they jump out in the event that it does not pay off.
According to LSEG data, the cost of insurance against the US government's debt is constantly growing and floats close to its highest level for two years.
Spreads or contributions According to LSEG data, on the basis of 1-year-old credit swaps, it was 52 base points from 16 base points at the beginning of this year.
Credit disorders swaps are like insurance for investors. Buyers pay a fee for protection in the event that the borrower – in this case the US government – could not pay off their debt. When the cost of US debt insurance is growing, it is a sign that investors are nervous.
Spreads on CDS discs with a 5-year-old tenor had almost 50 base points compared to about 30 base points at the beginning of the year. In the CDS agreement, the buyer pays a repetitive premium known as a spread for the seller. If the borrower, in this case, the US government undertakes to debt, the seller must compensate for the buyer.
CDS prices reflect how risky the borrower seems to be and are used to protect against signs of financial problems, not only full -fledged failure, said Rong Ren Goh, portfolio manager in a team with a constant income EastSpring Investments.
A recent increase in demand on CDS contracts is “protection against political risk, not insolvency,” GOH said, emphasizing the wider anxiety about the US fiscal policy and “political dysfunction”, and not the market view that the government directed its commitment.
Investors value increased concerns about the unsolved debt ceiling, said several industry observers.
“The default credit swaps have become popular because the debt ceiling remains unresolved,” said Freddy Wong, head of Asia and the Pacific with a constant Invesco income, indicating that the US Treasury reached the statutory debt limit in January 2025.
The Congress Budget Office stated in a March notification that the State Treasury has already reached the current debt limit of USD 36.1 trillion and did not take place for a loan, “in addition to replacing debt maturation”.
Treasury Secretary of Scott Bessent he said earlier this month that his department maintained federal tax revenues collected around April 15, the deadline for submitting the application for a more precise forecast for the so-called “X-Date”, referring to when the US government exhausts its loan ability.
Data from Morningstar show that the jump in CDS spreads for government debts usually adapted to the periods of increased worries around the US government debt limit, especially in 2011, 2013 and in 2023.
Wong pointed out that there are still several months before the US reached the X-Date.
The House of US representatives underwent a serious tax reduction package, which he apparently could see The debt ceiling increased by $ 4 trillion, They expect the Senate to be approved.
In a letter from May 9, Bessent called the leaders of the Congress To extend the debt ceiling until July, before the congress goes to the annual August break to avoid an economic disaster, but warned “significant uncertainty” on an exact day.
“There is still enough time for the Senate to convey its version of the Act at the end of July to avoid the default division in the US,” added Wong.
During the crisis of the debt ceiling in 2023, the US Congress adopted the project of suspension of the debt ceiling Just a few days before the US government made a non -performance of a technical commitment.
In the past, the US was dangerously similar to non -performance of the obligation, but in each case the congress acted at the last minute to raise or suspend the ceiling.
Fiscal reconing
The increase in CDS prices is probably a “short” reaction, while investors are waiting for the new budget agreement to increase the debt limit. According to industry observers, this is an unlikely sign of the upcoming financial crisis.
During the financial crash in 2008, institutions and investors actively traded CDS associated with securities secured by a mortgage, many of which were filled with high risk subprime loans. When the mortgage insolvency increased, the securities dropped with a value, which caused huge obligations to pay CDS.
However, the consequences for the increase in demand for sovereign CDs are very different in comparison with the demand for corporate CDs, which took place in 2008, in which investors actually called about the growing risk of failure to perform the obligation in corporations, said Spencer Hakimian, founder of Tolou Capital Management.
“It seems that traders believe that CDS is a speculative instrument of betting on the crisis of government debt, which I consider very unlikely,” said Ed Yardeni, president of Yardeni Research, who added that the US “always prioritizes the US” debt.
“The United States government will not pay off the debt by default. The fear that it can do it is not justified,” said CNBC.
Moody's at the beginning of this month reduced the grade of the US sovereign loan to AA1 with AAA, citing the deteriorating government fiscal health.
If the Senate exceeds the account on time, the huge increase in the ceiling will increase the supply of treasures, which is a condition of the fiscal deficit in the US in the light of the headlights, warned Wong.