United States 5 Years CDS - Historical Data
www.worldgovernmentbonds.com
United States 5 Years CDS. Updated interactive chart with historical CDS data.

A CDS is an insurance contract, where owner doesn’t need to own the property being insured. Owner must pay the amount in quarterly installments to seller. If there is a (arbitrated) credit event for any US bond maturity, the owner can get 100% of original value of bond when he gives the CDS seller the bond.

Probability is more complex than headline, but should actually be considered 0. US government will stop all other payments before defaulting temporarily, and mint a $1T platinum coin with everyone’s favorite president on its head.

But the 2% gain as a minimum is also unlikely. CDS will pay the full $100 of original bond, and a stress that includes even a minor credit event, will also send prices down and yields skyrocketing, and so far more than any extra 2% hit from a temporary default is to be gained.

Business schools will have told you that superpower CDS should always be 0, because it is defined as the risk free rate.

    • humanspiral@lemmy.caOP
      1·
      4 hours ago

      There’s $2.5T of insured value on the 5 year, I believe. That is $90b in premiums paid per year to insure against something that won’t happen in 5 years. It’s a bit of a puzzle why they have such high prices/volume for insurance with 0 payout probability, but some ideas.

      1. bank magic regulatory compliance, maybe combining leverage with CDS to count as unlevered “safe capital”
      2. The insurance kicks in for any “US credit event”. All CDS contracts on Russian bonds kicked in because Europe wouldn’t take payments. So something small can have a big payoff if US rates are under high pressure 5 years later.

      More CDS fun facts: 30 year bond CDS which seem to have a 50/50 chance of 2056 collapse/reorganization of the US cost under 0.5% per year, and have very low comparative total size of $300B. Japan’s CDS for same duration are actually cheaper than US despite no constitutional/other rules preventing default as an option, and they are tighter in a corner with few good options.

      In addition to your list, Dodd Frank includes a section where “All derivative payouts are hereby cancelled” presidential power. So the answer to the puzzle is that the same BS collateral rules/tricks that caused AIG to go bankrupt exist for US CDS, but not as much for JGB CDS. For one, you can sell CDS on US treasuries, while putting up US treasuries (in small fraction) as collateral against a US default which could make the collateral value as low as 0. Low interest in 30 year CDS can only be because of this absurdity that every other modern AIG would be unable to pay.