• Print
  • Email

Working Papers, No. 2023-17, April 2023 Crossref
What Does the CDS Market Imply for a U.S. Default?

(Revised May 2023)

As the debt ceiling episode unfolds, we highlight a sharp increase in trading activity and liquidity in the U.S. credit default swaps (CDS) market, as well as a spike in U.S. CDS premiums. Compared with the periods leading up to the 2011 and 2013 debt ceiling episodes, we show that elevated CDS spreads in the current environment are partially explained by the cheapening of deliverable Treasury collateral to CDS contracts. We infer the likelihood of a U.S. default from these CDS premiums, and estimate an increase in the market-implied default probability from about 0.3–0.4% in 2022, to around 4% in April 2023, which is lower than it was in July 2011 and about where it was in October 2013. Finally, we document changes in Treasury bills trading activity as market participant update their expectations for a U.S. default.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

Having trouble accessing something on this page? Please send us an email and we will get back to you as quickly as we can.

Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, USA. Tel. (312) 322-5322

Copyright © 2024. All rights reserved.

Please review our Privacy Policy | Legal Notices