Saturday, November 1, 2008 4 comments ++[ CLICK TO COMMENT ]++

Canadian government bonds safer than US?

How accurate are sovereign bond CDS? It seems that the CDS market is pricing Canadian government bonds as being safer than the US bonds. I highly doubt that the actual bonds reflect that but it's still interesting that speculators in the CDS market are expecting slightly higher default probability for the US (in fact, the US seems to be worse than Germany as well):

Sovereign credit default swaps are the market's way of putting a number on the chances of a government defaulting on its debt. Canada's five-year CDS levels are at 13 basis points - less than half the rating given to second-place Germany, at 33 points. The U.S. is at 38 points, Spain is at 93 and Korea is at 561.

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4 Response to Canadian government bonds safer than US?

contrariandutch
November 1, 2008 at 5:12 AM

Given the extreme illiqidity of most sovereign CDS this could be a political rather then economic statement. the Mellonists are rather fond of pointing to US sovereign CDS as "evidence" that no attempt should be made to stabilize the credit mess and the economy should be liquidated instead.

November 1, 2008 at 10:23 PM

I think the CDS on these big countries are probably a bit more liquid. I agree with you that they probably woudln't have the liquidity of anything like the stock market or the bond market on popular names.

Nevertheless, wouldn't you say that the US is definitely becoming more risky? Not just because of what has happened recently but because of the deteriorating picture over the last 10 years (long before any housing bust or market meltdown)?

contrariandutch
November 2, 2008 at 8:33 AM

US government debt has been increasing at a disconcerting clip for some time and the expense of stabilizing the financial system isn't helping. Also, I would expect a big sustained increase in government programs in the wake of what many regard as the "failure" of free markets. That will not help either. So the US government is piling up debt at a dangerous rate I think.

I definitely do not expect a straight default however, except in circumstances so dire and extreme that there isn't a counterparty on the planet who might be around to pay out on CDS.

Inflation is a different matter And it doesn't need to be hyperinflation. 5%/year over the course of a few decades works wonders for the real value of debt. CDS are of course useless if the US government inflates away it's obligations but pays in full in nominal terms.

So, US sovereign CDS seem useless to me except to make a political point.

November 2, 2008 at 1:57 PM

Like yoursefl, I never really understood who would buy the CDS on US govt debt. Although the cost is very low, it still means that some private market participants, without anyone forcing them, are actually thinking that the US govt will default--no less in 5 years!

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