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@ FLASH⚡️
2025-05-28 08:11:39
⚡️🚨 ALERT - While you slept, the price of credit default swaps on U.S. Government Debt has quietly risen to one of the highest levels since 2008.
This isn’t just market noise - it’s a warning signal about America’s fiscal health.
🗣️ According to Perplexity, here’s what’s happening and why it matters:
Credit default swaps are essentially insurance policies against government default.
When you see CDS spreads rising, it means investors are willing to pay more to protect themselves against the possibility that the U.S. might not be able to pay its debts.
The numbers are striking. It now costs about $51,330 annually to insure $10 million of U.S. government debt against default - up from roughly $29,000 in late 2024.
But what’s driving this sudden spike in perceived risk?
The immediate catalyst was the “Liberation Day” tariffs announced by President Trump on April 2, 2025, which imposed sweeping tariffs on most imported goods effective April 5.
Markets reacted poorly to these broad trade restrictions, fearing economic disruption, potential retaliation from trading partners, and increased uncertainty in global trade relations.
The timing is telling - CDS spreads showed a marked acceleration in their upward trend immediately following the tariff announcement.
But the tariffs are just the surface issue - deeper structural problems are driving this trend.
The fundamental driver is America’s deteriorating fiscal position.
The U.S. national debt surpassed $36.5 trillion in early 2025, pushing the debt-to-GDP ratio to approximately 124% - well above levels historically considered sustainable.
Interest payments on existing debt consumed 14.8% of federal revenue in 2024, severely limiting fiscal flexibility. Meanwhile, structural budget deficits have averaged 6.2% of GDP since 2020, more than double what’s considered sustainable for long-term fiscal health.
The situation becomes even more concerning when you consider the political dysfunction that has paralyzed meaningful reform efforts…
Rating agencies have specifically cited political gridlock as a critical factor in recent credit downgrades.
The 2024-2025 legislative session witnessed a 19-day government shutdown, three separate debt ceiling negotiations that approached default deadlines, and repeated failures to implement comprehensive fiscal reforms.
This political paralysis stands in stark contrast to other AAA-rated nations that have demonstrated greater capacity to address fiscal challenges through structural reforms.
The inability to govern effectively amplifies concerns about America’s long-term creditworthiness, regardless of its current ability to service debt obligations.
But here’s where it gets more complex - CDS spreads don’t just reflect default risk.
Unlike corporate bonds, U.S. government CDS have unique characteristics that make them part credit instrument, part interest rate derivative.
When Treasury prices fall due to rising yields, the “cheapest to deliver” mechanism in CDS contracts can artificially inflate spreads even without increased default risk.
However, analysis shows that the 2025 spike in CDS spreads is primarily driven by genuine credit concerns rather than technical factors.
The market-implied probability of default has risen to approximately 0.86% based on current CDS levels - a significant increase that reflects real deterioration in fiscal confidence.
The implications extend far beyond financial markets…
For now, the risk of actual default remains extremely low, but the trend is unmistakably negative and accelerating.
The CDS market is essentially pricing in a future where America’s fiscal trajectory becomes unsustainable without dramatic policy changes.
With mandatory spending programs continuing to grow as the population ages, and political gridlock preventing meaningful reform, investors are beginning to hedge against scenarios that were once considered unthinkable.
While the U.S. retains significant advantages - including control over the world’s reserve currency and the deepest capital markets globally - the rising cost of default protection reflects growing recognition that these advantages may not be permanent.
The message from the CDS market is clear: America’s fiscal house needs urgent attention before market confidence erodes further.
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