The Evolving Market for U.S. Sovereign Credit Risk
Nina Boyarchenko and
No 20200106, Liberty Street Economics from Federal Reserve Bank of New York
How should we measure market expectations of the U.S. government failing to meet its debt obligations and thereby defaulting? A natural candidate would be to use the spreads on U.S. sovereign single-name credit default swaps (CDS): since a CDS provides insurance to the buyer for the possibility of default, an increase in the CDS spread would indicate an increase in the market-perceived probability of a credit event occurring. In this post, we argue that aggregate measures of activity in U.S. sovereign CDS mask a decrease in risk-forming transactions after 2014. That is, quoted CDS spreads in this market are based on few, if any, market transactions and thus may be a misleading indicator of market expectations.
Keywords: US; sovereign; CDS (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
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