What Does the CDS Market Imply for a U.S. Default?

16 Pages Posted: 20 Oct 2023

See all articles by Luca Benzoni

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Christian Cabanilla

Federal Reserve Banks - Federal Reserve Bank of New York

Alessandro Cocco

Federal Reserve Bank of Chicago

Cullen Kavoussi

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 3 versions of this paper

Date Written: October 19, 2023

Abstract

We document the sharp increase in trading activity, gross and net notional outstanding, and overall premiums in the U.S. sovereign credit default swaps (CDS) market that took place during the 2023 debt ceiling episode. Unlike the periods leading up to the 2011 and 2013 debt ceiling events, we show that in the recent episode elevated CDS spreads were partially due to a high expected loss given default, because of the very low valuations of long-term Treasury securities that would have been deliverable to settle CDS contracts.

Keywords: U.S. default; U.S. CDS; default probabilities; sovereign CDS; debt ceiling

JEL Classification: G10; G12; G18; G28; E32; E43; E44

Suggested Citation

Benzoni, Luca and Cabanilla, Christian and Cocco, Alessandro and Kavoussi, Cullen, What Does the CDS Market Imply for a U.S. Default? (October 19, 2023). Economic Perspectives, No. 4, 2023, Available at SSRN: https://ssrn.com/abstract=4607106

Luca Benzoni (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

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Chicago, IL 60604
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312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Christian Cabanilla

Federal Reserve Banks - Federal Reserve Bank of New York

Alessandro Cocco

Federal Reserve Bank of Chicago

230 South LaSalle Street
Chicago, IL 60604
United States

Cullen Kavoussi

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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