Debt ceiling fears push the cost of insuring against a US government default to highest level since 2008 crash



The cost of insurance against the US failing to repay its debts rose to its highest level since the financial crisis last week, as traders worried that political deadlock in Washington might lead to a default.

One-year government credit default swaps traded at 106 basis points Saturday – the most expensive they’ve been since 2008, according to a Financial Times report that cited Bloomberg data.

Credit default swaps – or CDSs – are a form of insurance against a borrower not making scheduled payments on their debt.

The price of one-year government CDSs has spiked 15 basis points in 2023 with traders spooked by the looming threat of a debt-ceiling crisis, the FT reported.

The debt ceiling is a limit on how much the government can borrow, set by Congress. The US hit its $31.4 trillion debt limit in January – and that means it could run out of money to pay its bills as soon as July if lawmakers don’t vote to raise the ceiling, according to the Congressional Budget Office.

Author(s): George Glover

Publication Date: 24 Apr 2023

Publication Site: Yahoo Finance

Credit Default Swaps Imply a Two Percent Chance the US Defaults




The implied odds are two percent but contract trading is very thin. And some of the protection is mandatory.  If regulators raise risk flags, some banks feel compelled to buy insurance. 

So most likely the true odds of default are much lower.

There is also a three day grace period. We could have a default, but if it is rectified within three days, those betting on a default will be technically correct yet receive no payout.

I believe the odds of a payout on these contracts is essentially zero. But yeah, if there is a default for a couple of days, there will be “chaos” as several people on Twitter have commented. 

Author(s): Mike Shedlock

Publication Date: 21 Apr 2023

Publication Site: Mish Talk

The Biggest Business Fails of All Time



3. Spreadsheet error costs JPMorgan $3.1 billion

You might recall the “London Whale” incident in 2012, when notorious trader Bruno Iksil — whose other monikers include the White Whale and even Voldemort — conducted a series of credit default swaps that cost JPMorgan Chase $6.2 billion.

What you might not know, however, is that half the loss was incurred by a simple Excel spreadsheet error.

Bloomberg reports that the Excel model, which relied heavily on copy and pasting of information, accidentally “underestimated risk by half.”

Author(s): Serah Louis

Publication Date: 1 March 2021

Publication Site: MoneyWise