Investing.com - Investors might feel a sense of déjà vu as they observe the familiar pattern that unfolds whenever the US debt ceiling looms and political gamesmanship takes center stage. This recurring event triggers an increase in credit default swap spreads for the United States government.
A credit default swap (CDS) essentially serves as an insurance policy for holders of a borrower's debt security, safeguarding them against potential defaults. The purchaser pays a premium, which is presented as an annual rate. In exchange, should there be a default, they have the right to claim full value by trading in a bond from the defaulted borrower.
On paper, no borrower is more secure than the United States – it is not only the world's richest nation but also borrows money using the global reserve currency. Additionally, its interest expenses are considered to be at benchmark risk-free rates.
Nevertheless, each time there's turmoil surrounding discussions over raising or suspending America’s borrowing limit, U.S. CDS spreads experience significant increases – often surpassing those seen with less reliable sovereign borrowers.
For example, let us consider Greece - currently sitting at 45 basis points when it comes to insuring against Greek bond defaults within one year. Comparatively speaking, during these tense moments around U.S.'s debt ceiling debate; we see figures rise up to 177 basis points from their usual average of about 15 basis points according to data provided by Franklin Templeton.