Sunday, March 15, 2009

Bad Omen for U. S. Government Debt

The cost of buying a credit default sway (CDS) on U. S. government debt is soaring. The spread has widened from 14 basis points a year ago to 97 basis points now. To put this in perspective, the cost to buy insurance against the possible default of U.S. government bonds (sovereign debt) has risen to $97,000 per $1,000,000 of debt. Yikes. This makes the cost of buying insurance roughly equivalent to that of France.

The potential for a downgrade of U. S. sovereign debt is listed as considerable by Moody's. Moody's describes the current situation for the debt as:
Resilient Aaa, whose ratings are being tested but, in our view, display sufficient capacity to grow out of their debt and repair the damage.

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