US credit default swaps have hit a record high

5/12/2023

US credit default swaps have hit a record high, per Bloomberg.

Spreads on U.S. one-year credit default swaps (CDS) - market-based gauges of the risk of a default - widened to 172 basis points, an all-time high, according to S&P Global Market Intelligence data, up from a close of 163 on Thursday.

Due to the mechanics of a potential CDS payout, the probability of a default implied by the CDS could be lower than what current levels suggest, analysts said.

"The fact that yields have gone up so much for long-dated bonds means that the implied probability of default that we're seeing in the CDS market right now is far lower than it appears, especially relative to prior episodes," said Karl Schamotta, chief market strategist at Corpay.

"We found a lower market-implied default probability than in 2011 ... despite much wider CDS spreads today," they said.

Moody's Analytics assigned a 10% probability that the debt limit would be breached. "What once seemed unimaginable now seems a real threat," it said.

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