Rising Costs of Insuring U.S. Debt

By Davide Barbuscia

NEW YORK (Reuters) – The cost of insuring exposure to U.S. government debt has climbed to its highest in nearly one year, suggesting investors are getting nervous about a U.S. presidential election outcome that could impede the government’s ability to repay debt.

Spreads on U.S. one-year credit default swaps (CDS) – market-based gauges of the risk of a default – widened to 49 basis points on Thursday, according to S&P Global Market Intelligence data, the highest since November 2023.

These spreads have been rising steadily over the past few weeks, coinciding with financial markets pricing in better chances of victory for Republican candidate Donald Trump in the November 5 presidential election.

However, the higher risk of default as reflected by the derivative contract is more likely to indicate early investor concerns over a U.S. borrowing-limit political dispute next year rather than hedges against the election outcome, according to Barclays analysts in a note on Thursday.

> “USA CDS have historically not been viewed as an election hedge… Arguably, investors are pricing in increased concerns around the debt ceiling,” they stated.

Barring an earlier resolution, the federal debt ceiling will be reinstated in January 2025, following a suspension in 2023 after protracted Congress negotiations. Without a new suspension or limit increase, the Treasury Department may need to rely on cash reserves and extraordinary measures until it can no longer meet its obligations – a situation termed as the 'X-date,' which some analysts estimate could occur in the latter half of 2025.

A divided government could complicate debt limit discussions, similarly to 2023 when political brinkmanship nearly led the country to default and negatively impacted its credit rating.

According to Barclays, one-year CDS spreads have historically increased before previously contentious debt ceiling negotiations, such as those in 2011 or 2023, rather than ahead of presidential elections.

This time, the CDS spreads have widened sooner than expected. Barclays indicated: “This could be a reflection of the uncertainty surrounding the election results and how they might affect the reinstating of the debt ceiling on January 2.”

Still, one-year CDS spreads remain significantly lower than last year, when they peaked at a record high of approximately 150 basis points in May. Barclays estimates the current CDS implied probability of a default at less than 1%, compared to about 4% in May of last year.