As the White House and top Republican lawmakers are stuck at an impasse over the debt ceiling, the cost of insuring exposure to U.S. government debt has touched record highs.
Spreads on 1-year credit default swaps (CDS), a market-oriented measurement of default risks, climbed to a record high of 172 basis points on May 10. Spreads on 5-year CDS also reached a 12-year high of 65.3 basis points.
CDS are financial instruments used to enable lenders to insure against default by borrowers. Investors owning government bonds, bank credits, or corporate debt can purchase credit-default swaps to shield their investments against default and allocate these risks to sellers. Traders can also use CDS for speculative bets….