For the past 3-4 months I've been following U.S. Treasury CDS spreads out of morbid curiosity. CDS, or Credit Default Swap contracts, are insurance policies against the default of bonds. They exist for corporations as well as government bonds, including the U.S. Treasury bonds. If you pay up front for CDS contracts covering $1,000 in U.S. Treasury bonds, and the U.S. Treasury were to default, you would receive compensation covering all the money lost.
As of today, the CDS spread on a 5-year Treasury note is 72.9 bps; in other words, it would cost $7.29 to insure $1,000 worth of 5-year U.S. Treasury debt. Historically, these spreads have hovered around 15bps; clearly, the invincibility of U.S. sovereign debt is a thing of the past. The markets currently peg U.S. sovereign debt as riskier than Japanese, German, and French debt. Strange, huh?
I'll be studying Treasury bonds in detail over the next few months, for a couple of projects. One is an independent study project in which I'll be projecting the outcome of a default by the U.S. Treasury, an event that the markets are telling us is now a possibility, even if a remote one. Also, I'll be working with Case financial markets specialist Peter Ritchken on forecasting U.S. Treasury bond yield curve changes, a slightly more technical endeavor. I'll be sure to post periodic updates on both of these.
