The US Government’s response and handling of the financial crisis has stretched the entire system to the point of breaking apart. Credit default swaps (CDS) is essentially a measure of risk. The higher the CDS is the higher the cost is to insure against default.
The CDS spreads for individual companies has risen dramatically over the past 6 months on financial firms as the risk of those firms becoming insolvent has risen. So who is the latest company to have their CDS rise? It is the US Government.
The cost of insuring against default has risen once again with the US Treasury 5 Year at 52bps, and the 10 Year at 55bps. Both are record highs. Why would these number be rising? Very simple… the US government is stretching the system too far and fear is rising that the US government will default. With each and every ‘bail out’ announcement the government is essentially maxing out their ‘credit cards’ and the market is fearful that they won’t be able to pay the bill.
(I apologize for the very late posting of this market summary.)
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