What does the CDS market imply for a U.S. default?

Arbeitspapier

As the debt ceiling episode unfolds, we highlight a sharp increase in activity across the U.S. credit default swaps (CDS) market and infer the likelihood of a U.S. default from these market prices. Beginning in January 2023, we document a significant increase in U.S. CDS trading activity and positions, accompanied by a spike in CDS premiums. We estimate an increase in the market-implied default probability from about 0.2-0.3% in 2022, to approximately 1% in 2023. Yet, this default probability currently remains lower than what we find for the periods leading up to the 2011 and 2013 debt ceiling episodes, due in part to the cheapening of deliverable Treasury collateral to CDS contracts.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. WP 2023-17

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates ; General Financial Markets: Government Policy and Regulation ; Financial Institutions and Services: Government Policy and Regulation ; Business Fluctuations; Cycles ; Interest Rates: Determination, Term Structure, and Effects ; Financial Markets and the Macroeconomy
• Subject: U.S. default ; U.S. CDS ; default probabilities ; sovereign CDS ; debt ceiling

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Benzoni, Luca ; Cabanilla, Christian ; Cocco, Alessandro ; Kavoussi, Cullen
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Chicago
• (where): Chicago, IL
• (when): 2023

Further information

• DOI: doi:10.21033/wp-2023-17
• Handle: http://hdl.handle.net/10419/284058
• Last update: 10.03.2025, 11:45 AM CET