Author Details

Andras Rokob

Andras Rokob

Vice President, MSCI Research

Andy Sparks

Andy Sparks

Managing Director, MSCI Research

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Will the US Government Default?

  • Markets are reacting to a potential default on the U.S. government’s debt obligations.
  • Trading in credit-default swaps on the U.S. government has noticeably picked up since the beginning of the year.
  • Implied default probabilities have increased to levels not seen since the 2013 debt-ceiling debate.

The debt-ceiling debate has heated up in Congress, with estimates that the U.S. government’s ability to borrow may be exhausted sometime between July and September, assuming legislation has not been passed by then.1 Legal arguments have been made that the U.S. Constitution does not allow the government to default on its debt obligations.2 Nevertheless, a noteworthy pick-up in trading activity in credit-default swaps (CDS) indicates that some market participants challenge this view.

Historically, CDS on the U.S. government attracted little interest in the market and were thinly traded. CDS on emerging-market sovereigns generated the vast majority of single-issuer trading.3 Since mid-January, however, there has been a very noticeable pick-up in activity on U.S. CDS, as shown in the exhibit below.


Greater trading activity in US-government CDS

This chart shows the rise in net notional value in the outstanding credit-default swaps on the U.S. government compared to the outstanding CDS for China, Brazil and Mexico. U.S.-government CDS trading has clearly risen, though remains below the level of the other countries’ sovereign CDS

Source: Depository Trust & Clearing Corp.


Spiking CDS spreads and higher implied default probabilities

Protection payouts on CDS are triggered by issuers not making scheduled coupon or principal payments. This could range from a situation where payments are delayed for only a short period (“a technical default”) to other situations where payments of principal or interest are permanently reduced or eliminated.

This year’s spike in CDS spreads on U.S. government bonds has been swift and large, but not unprecedented. Indeed, CDS spreads also spiked in 2011 and 2013 during battles over the debt ceiling (see the left-hand chart in the exhibit below). In those earlier crises, Congress reached political compromise and credit concerns faded.

Implied probabilities of default can be derived from CDS spreads, but require making assumptions about recovery rates if a default event is triggered.4 The right-hand chart in the exhibit below shows default probabilities implied by the market for one-year U.S.-government CDS, using a variety of recovery assumptions. Assuming a 95% recovery, the CDS market’s one-year implied default probability was 11.3%, as of Feb. 24, up significantly from the 3.3% probability prevailing at the beginning of the year.

Although trading activity has picked up, single-issuer CDS trading offers less liquidity to investors than index CDS such as CDX or ITRAXX. Diminished liquidity in CDS trading means that the CDS spread for an actual transaction could deviate significantly from the quoted spread. In this event, the market-implied probability of default could deviate substantially from the results highlighted in our analysis.


Debt-ceiling battles pushed up CDS spreads and implied default probabilities

The chart shows previous spikes in U.S.-government CDS that took place at the time of the 2008 global financial crisis and during the 2011 and 2013 debt-ceiling standoffs in the U.S. Congress. CDS spreads widened to a level higher than during the crisis. The right-hand chart shows the market-implied probability of U.S. default under different scenarios for what bondholders would recover of their principle in the event of a default. It shows there was a greater than 10% chance, as of Feb. 24, of a default where investors would recover 95% of their principle

Source: S&P Global Market Intelligence, MSCI


Follow the CDS

In the absence of legislative agreement, CDS trading volume on the U.S. government may continue to strengthen as summer approaches, and the possibility of missing payments on U.S. Treasurys looms larger.

The consequences of a potential default by the U.S. government extend beyond the immediate impact on holders of Treasurys. Major market dislocation and a sharp slowdown in economic activity could both be realistic possibilities. Investors concerned about such developments may find the CDS market to be useful in assessing the overall market’s view of the likelihood of a U.S.-government default.

The authors thank Gabor Almasi, Andras Szegleti and Sean Warshell for their contributions to this post.



1“The Federal Debt and the Statutory Limit.” Congressional Budget Office, February 2023.

2David Rivkin and Lee Casey. “Default on U.S. Debt is Impossible.” Wall Street Journal, Feb. 20, 2023.

3“Aggregated Transaction Data by Reference Entity of Single-Name Credit-Default Swaps (CDS)—Top 1000 Single Names.” DTCC reports from 2010-2022.

4Recovery is the percent of bond principal bondholders recover in the event of a default.



Further Reading

Signs of Contagion from the Russia-Ukraine War

Venezuela and the Specter of Recovery Risk

US Market Report - 2011, A Year for Minimum Volatility

Did ESG Ratings Help to Explain Changes in Sovereign CDS Spreads?