By Davide Barbuscia

Rising Costs of Insuring U.S. Government Debt

NEW YORK (Reuters) – The cost of insuring exposure to U.S. government debt has climbed noticeably over the past month and remains stubbornly high, as jittery investors brace for a looming U.S. borrowing-limit political debate as well as overall policy uncertainty.

Spreads on U.S. credit default swaps (CDS) – market-based gauges of the risk of a sovereign default – widened to their highest since the debt ceiling crisis of 2023 in recent weeks. The size of the market and trading volumes have also increased recently, Barclays said in a note this week, in a sign that a product generally considered to be niche is garnering more investor attention.

While years ago, buying protection for a U.S. default was an unpopular trade, things have changed recently due to policy uncertainty in Washington. Greg Peters, co-chief investment officer of PGIM Fixed Income stated, “Now, with the debt ceiling and everything else going on, no one wants to be short that option.”

U.S. sovereign CDS spreads have increased not just for short-dated maturities but across the curve, with one-year and five-year spreads at their highest since May 2023 when the U.S. was on the verge of default due to political brinkmanship over the debt ceiling.

On Friday, those spreads stood at 60 basis points and 56 basis points, respectively – a touch lower than in recent weeks but still significantly higher than in March, as shown by S&P Global Market Intelligence data.

The rise in protection costs has gained momentum after April 2 when U.S. President Donald Trump announced sweeping tariffs, which sparked a sharp selloff in the Treasury market, the bedrock of the global financial system. Peters noted, “What you’ve seen since April 2 is a real rise in that risk premium.”

After days of heavy selling, Treasuries rallied after Trump announced a 90-day tariff pause for most U.S. trading partners, likely prompted by the tariff-fueled selloff. Benchmark 10-year yields were last at 4.36%, about 20 basis points lower than the high they touched on April 11, the day tariffs were paused.

Still, another key measure of risk embedded in Treasury bonds, which captures the premium investors charge for policy uncertainty, has remained elevated in recent weeks, according to New York Fed data.

The U.S. government reached its statutory borrowing limit in January and began employing “extraordinary measures” to keep it from breaching the cap and risking a potential default. Barclays analysts noted that the so-called X-date, when the government will no longer be able to pay all its obligations, will likely fall in late August or early September, but an economic slowdown could pressure the Treasury’s cash position and pull that date forward.

Treasury Secretary Scott Bessent stated earlier this week that the department was “at the warning track” in terms of exhausting remaining borrowing capacity under the federal debt ceiling, but vowed that the government would not default on its obligations.

Investors held about $3.9 billion worth of active credit insurance contracts on U.S. government debt as of May 2, Barclays said, citing data from the Depository Trust and Clearing Corporation. This is up from $2.9 billion at the beginning of the year.

Over the past three months, credit insurance on U.S. government debt has been the 12th most-traded single-name CDS contract globally, with weekly trading averaging over $625 million, according to Barclays.