Author Details

Andy Sparks

Andy Sparks

Managing Director, MSCI Research

Michael Wang

Michael Wang

Associate, MSCI Research

Social Sharing

Extended Viewer

The CDS Market’s View on US Default

  • As of May 3, the spread on one-year credit-default swaps (CDS) on the U.S. government implied a 3.9% probability that the U.S. would default — double the level from two months earlier and nearly 10 times higher than at the beginning of the year.
  • Our methodology is based on the Treasury most likely to be delivered in the CDS auction process and offers insights into how CDS spreads may also reflect noncredit factors.
  • We found a lower market-implied default probability than in 2011 (another debt-ceiling crisis), despite much wider CDS spreads today, highlighting how a simple comparison of CDS spreads may result in misleading inferences.

Treasury Secretary Janet Yellen’s recent warning that the U.S. debt ceiling could be hit as early as June 1 adds to growing investor concern that the U.S. government could default on its debt obligations. As the debt-ceiling debate has heated up, CDS spreads have generated growing interest as a measure of the U.S. government’s creditworthiness.


CDS on US government not purely a measure of credit

Our analysis indicates that CDS on the U.S. government have not only credit exposure, but elements of an interest-rate put option. The value of this option increases when Treasury yields rise and prices fall, but its payoff occurs only if the U.S. defaults.

In this way, CDS on the U.S. government can be viewed as hybrid instruments, with exposure both to credit concerns over the government’s ability to pay its debt and to changes in Treasury yields resulting from monetary policy, inflation trends and other noncredit factors.


Lowest-priced Treasury is cheapest to deliver

CDS spreads depend partly on the price of the deliverable security determined as part of the CDS auction process.1 In the case of U.S. government debt, our assumption is that all public U.S. Treasurys would comprise the list of securities eligible for delivery. The final auction price should reflect the lowest-priced eligible security, often referred to as the cheapest to deliver.2

As of May 3, the lowest-priced Treasury was a 30-year bond issued during the depths of the COVID-19 crisis in 2020 with a coupon of 1.25%, when yields were exceptionally low. Driven by higher inflation and the Federal Reserve’s aggressively pushing up rates, the price of this bond sharply declined to approximately 58. Given this price and the prevailing CDS spread, the market-implied one-year probability of default was 3.9%, as shown in the exhibit below.3

We also compared the market-implied probabilities of default when CDS spreads were at their peak, during the debt-ceiling crises of 2011 and 2013. Although CDS spreads were lower than levels in May of 2023, prices on the cheapest-to-deliver Treasurys in 2011 and 2013 were much higher.4 The net result is that the market-implied default probability for May 3, 2023, was lower than the 2011 probability and similar to the 2013 probability. This pattern of default probabilities underscores that changes in CDS spreads over time may not be solely attributed to changes in creditworthiness.


Default probability depends on deliverable price and CDS spread

Source: S&P Global Market Intelligence, Refinitiv, MSCI


What caused the US one-year CDS-spread spike of 2023?

That CDS spreads can also be influenced by interest rates raises the possibility that the 2023 spike in CDS spreads could partly be driven by rates and not credit. But through May 3, prices of long-maturity Treasurys during 2023 were largely range-bound, and our analysis indicated that the 146-basis-point spike in the one-year spread can be attributed almost entirely to an increase in the probability of the U.S. government’s defaulting, as the exhibit below shows.5


2023 spike in CDS spreads caused by credit, not interest rates

Source: S&P Global Market Intelligence, Refinitiv, MSCI


Noncredit factors could also influence CDS spreads

Investors may be tracking the CDS market for clues about the possibility of U.S.-government default, but our analysis indicates that spreads could also change for noncredit reasons such as shifts in Federal Reserve policy or unexpectedly high (or low) inflation.

To provide a basic understanding of how CDS spreads could be affected, the exhibit below shows the hypothetical change in CDS spreads when the price of the cheapest-to-deliver Treasury changes but the implied default probability is held constant. In the scenario where the implied probability of default is held constant at 4%, our methodology indicates that CDS spread could increase by approximately 13 basis points if the cheapest-to-deliver Treasury price fell by 5%.


Falling price of Treasury deliverable could push up CDS spread

Source: S&P Global Market Intelligence, Refinitiv, MSCI


This debt crisis could be different

During 2011 and 2013, when the U.S. came close to hitting the debt ceiling, political compromise was ultimately reached. Market participants may hope for a similar outcome in the current environment, but may also want to prepare for the possibility of a less benign result. Even if just for a few days, a default by the U.S. government on its debt obligations could have far-reaching and long-term consequences.

The authors thank Gabor Almasi and Andras Rokob for their contributions to this blog.



1Matt Levine. “Why would anyone buy credit default swaps on the U.S. government?” Bloomberg, Sept. 26, 2013.

2“Credit Event Auction Primer.” Markit, February 2010.

3In the case of the U.S. government’s default, our analysis assumes a technical default where the price of the cheapest-to-deliver Treasury is not impacted by the credit event.

4Robin Wigglesworth. “Does Treasury bedlam beckon?” Financial Times, March. 8, 2023.

5We decomposed the change in the one-year CDS spread into ΔPD (probability of default)∗EP (expected CDS payout:100−deliverable price) and PD∗ΔEP. The residual term ΔPD∗ΔEP was attributed evenly to each to ensure it adds up to be the ΔCDS Spread.



Further Reading

Will the US Government Default?

Signs of Contagion from the Russia-Ukraine War

Venezuela and the Specter of Recovery Risk