Investing Blog

Credit Default Swaps, essentially derivative-based insurance against loss, on US debt surged nearly 600% since the recession began as investors worry that the US government may default on its Treasury issues. The increase outpaced corporate debt issues which in the same time increased only 30%. Rising costs are the direct result of increased Treasury issues and a mounting US debt which investors increasingly fear may never be paid back.

Currently CDS on government debt costs as much as 97 basis points or $9,700 for each $1 Million of insurance. From the insurer’s perspective, this means that the US government has nearly a 1% (actually .97%) chance of defaulting on debt. That’s a pretty scary statistic considering CDS for government debt cost roughly .15% of the issue just one year ago.

Higher spreads may also be the result of many big name firms cutting their exposure to the derivatives market. AIG, the world’s largest insurer and recipient of billions in TARP money, was extremely active on the derivatives market where it bought and sold protection against market defaults. The company has virtually gone bankrupt as its bets in real estate and corporate debt did not pay off and cost the company billions.

Whether fears from investors are warranted or not is an entirely different question. This post is just some food for thought, take a glimpse and see what $700 Billion in TARP, a $800 Billion Stimulus and $410 spending package have done for the US Government’s fiscal image.

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Investing, TARP and Bailouts