The trader works on the New York Stock Exchange (NYSE) floor at Opening Bell in New York City on May 27, 2025.
Timothy A. Clary | AFP | Getty Images
Investors are nervous that the US government may struggle to pay its debt. And they have insurance in case it’s the default.
According to LSEG data, the cost of ensuring US government debt exposure is steadily increasing, approaching its highest level in two years.
The US one-year credit default swap spread or premium rose to 52 basis points as of Wednesday from 16 basis points earlier this year, LSEG data showed.
Credit default swaps are similar to investor insurance. Buyers pay fees to protect themselves in case the borrower (in this case the US government cannot pay off their debts. The rising costs of ensuring US debt are a sign of investors being nervous.
The spread on the five-year tenor CD was almost 50 basis points compared to the approximately 30 basis points at the beginning of the year. In a CDS agreement, the buyer pays a repeat premium known as a spread to the seller. If the borrower, in this case, the US government defaults on its debt, the seller must compensate the buyer.
CDS prices reflect how dangerous borrowers are and are used not only to fully default, but also to prevent signs of financial difficulties, says Rong Ren Goh, portfolio manager for the bond team at Eastspring Investments.
The recent surge in demand for CDS contracts is not a market view that encourages governments to not meet their obligations, but a “hedge against political risk, not bankruptcy,” highlighting broader uncertainties about US fiscal policy and “political dysfunction.”
Investors are priced at growing concerns about the outstanding debt cap, watchers from several industry said.
“Credit default swaps are once again popular as debt caps remain unresolved,” said Freddy Wong, Asia-Pacific Head of Invesco’s bonds, noting that in January 2025 the US Treasury reached statutory debt limits.
The Congressional Budget Office said in a notice in March that the Treasury had already reached its current debt limit of $36.1 trillion and had no room to borrow “other than replacing mature debt.”
Treasury Secretary Scott Bescent said earlier this month that his department tallyed federal tax receipts collected around April 15 to bring up a deadline to come up with a more accurate forecast for the so-called “X-Date,” referring to when the U.S. government will run out of its borrowing capabilities.
Morningstar data shows that CDS spikes spread across US government debt, particularly in 2011, 2013 and 2023, are in line with growing concerns about US government debt restrictions.
Wong pointed out that there are still a few months before the US reached the X day.
The U.S. House of Representatives has passed a major tax cut package that reportedly reportedly has increased its debt cap by $4 trillion due to pending Senate approval.
In a May 9 letter, Bescent urged Congressional leaders to extend the debt cap by July before departing for the annual August retreat to avoid economic disasters, but warned the exact date of “significant uncertainty.”
“There’s plenty of time for the Senate to pass a version of the bill by late July to avoid technical defaults from the US Treasury,” Wong added.
During the 2023 debt cap crisis, US Congress passed a bill that would suspend the debt cap just days before the US government concluded a technical default.
In the past, the US has been dangerously close to default, but in each case Congress acted at the last moment to raise the ceiling or pause.
Financial calculations
The surge in CDS prices could be a “short-lived” response, but investors are waiting for new budget contracts to raise debt restrictions. According to industry watchers, it is not a sign of an imminent financial crisis.
During the 2008 financial meltdown, institutions and investors actively traded CDs linked to mortgage-backed securities. Many of them were filled with high-risk subprime mortgages. As mortgage defaults spiked, these securities fell sharply in value, resulting in a massive CD obligation.
However, the impact on rising demand for sovereign CDs is significantly different compared to the demand for corporate CDs in 2008, when investors made actual calls to increase the risk of default in companies.
“Traders seem to believe that CDS provides a speculative tool to wager on the government’s debt crisis, which I think is very unlikely,” said President Ed Yadeni of Yadeni Research.
“The US government should not neglect its debt, and the fear that it might do that is not justified,” he told CNBC.
Earlier this month, Moody’s downgraded the US sovereign credit rating from AAA to AA1, citing the government’s worsening financial position.
If the Senate passes the bill in time, a massive ceiling increase will boost Treasury supply and bring US deficit conditions back into the spotlight, Wong warned.
