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The Evolving Market for U.S. Sovereign Credit Risk

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Listed:
  • Nina Boyarchenko
  • Or Shachar

Abstract

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.

Suggested Citation

  • Nina Boyarchenko & Or Shachar, 2020. "The Evolving Market for U.S. Sovereign Credit Risk," Liberty Street Economics 20200106, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:86693
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    Keywords

    US sovereign CDS;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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