The U.S. Treasury Default Risk Meme

There is no doubt that the U.S. is taking on immensely more financial risk every week, and so there should be little surprise that credit markets are more nervous about it. They should be. The U.S. is mortgaging its future for its financial services present, and it remains to be seen what the total costs and consequences will be.

But let’s be clear. Fear-mongering articles about widening credit default swap spreads in U.S. Treasuries –- like this one in Reuters — need to be taken with a grain of salt.

Some questions that need answering:

  • What does Treasury default spreads briefly widening from 49.3 to 49.8 –- a 1% increase -– really mean?
  • How much trading volume is there in Treasury CDS anyway?
  • If the U.S. defaults on Treasuries, isn’t that a little like saying we’re all screwed, so it’s sort of a latent measure of risk in the system?
  • What does default mean for debt sold by the U.S. in U.S. dollars anyway?

Don’t get me wrong. I’m not saying that the U.S. hasn’t gotten itself in a dire predicament with expensive and often dubious bailouts of U.S. financials, but we need to tread a little more carefully in blithely citing CDS data in support of further alleged weakening.