The amount of money being placed on the ‘wheel of nation defaults‘ has risen quite remarkably over the past year. Some investors are using the derivatives market to place bets that the United States, Japan, and/or the United Kingdom will default on their bonds at some future date.

It all comes down to the growing debt that the richest nations are finding themselves buried in resulting from declining tax revenues and the massive spending in bailouts. And all of that is on top of a record deficit.

According to data from Deutsche Bank Research, the total gross public debt as a percentage of GDP is expected to rise to 97.5% by 2010 (was 61.7% in 2006). In Japan the figure is 199.8% in 2010 and will be 89.3% in the United Kingdom.

The gross national sovereign credit default swap (CDS) volume outstanding (bets that the nation will default) has risen nearly 150% in just the past year. For Japan it is a rise of 114% and the United Kingdom is witnessing a rise 102% in the amount of money being placed as a bet the nation will default.

Gary Jenkins, head of fixed income research at Evolution, said: “The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world.

“If we get to a point where the market thinks the levels of debt are unsustainable, then we will see an almighty sell-off in the government bond markets, with yields soaring. Governments need to take action to cut deficits and debt.”

Fitch Solutions, the data arm of the Fitch Group, said that there is almost as much uncertainty in the CDS market about the outlook for the developed economies and their bond markets as there is for emerging economies.[...] Source: FT

Those investors, hedge funds, and probably even some large banks are not confident that these rich nations will be able to control the debt. If economic conditions were truly improving then we should be seeing a dramatic decline in sovereign default risks. Instead the market is viewing the chances of default as increasing.