According to Business Insider, the cost of default insurance in the US has reached a new high this week. This is due to fierce debates among lawmakers regarding the debt ceiling. In Washington, two parties are in conflict over raising the country’s debt ceiling of over $31 trillion. As a result, the cost of potential default insurance reached a peak on Thursday. Annual credit default swaps (CDS) in the US were traded at 152 basis points, surpassing the previous peak of 134 points reached in late April when these derivatives were at their most expensive since the 2008 global financial crisis. Buyers of credit default swaps seek insurance against borrowers who may not fulfill their debt obligations.
It should be noted that historically, the US has never defaulted on its debt, although investors seem to be increasingly nervous about the possibility. This is because there is still no agreement among lawmakers on the debt ceiling. Finance Minister Janet Yellen warns that the US may run out of money to pay off debt as early as June 1, which would trigger an unprecedented economic crisis.
The Republican-controlled House of Representatives recently passed a bill proposed by Speaker Kevin McCarthy to raise the debt ceiling in exchange for an approximately 8% reduction in government spending by 2024. However, this bill is unlikely to pass through the Democrat-controlled Senate or be signed by President Joe Biden. Democrats require a bill that would raise the debt ceiling without any conditions.