Credit Swaps on U.S. Treasuries Rise After S&P Pulls Top Grade
The cost of protecting U.S. Treasuries from default rose to the highest in more than a week after Standard & Poor’s cut the AAA credit rating of the world’s largest economy for the first time.
Credit-default swaps insuring U.S. Treasuries for five years rose 3.5 basis points to 58.5 as of 11 a.m. in London, according to CMA. The contracts are still below the 29-month high reached two weeks ago when Congress struggled to raise the nation’s debt ceiling.
“The bet is that the credit quality of the U.S. will decline further, and investors will be willing to purchase protection at higher prices,” Philip Gisdakis, a Munich-based strategist at UniCredit SpA, said by phone.
S&P blamed “uncertainty” in the U.S. policymaking process as the ratings firm cut the government’s top rating one level to AA+ on Aug. 5. The cost of protecting European government bonds from default tumbled after the European Central Bank was said to buy Spanish and Italian bonds as part of a plan to tackle the region’s debt crisis.
U.S. Treasuries rose as tumbling stock markets sparked demand for the safety of government debt, reversing an initial decline after S&P’s downgrade. The benchmark 10-year yield fell 8 basis points to 2.48 percent in London, according to Bloomberg Bond Trader prices.
A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
To contact the reporter on this story: Charles Mead in London at cmead11@bloomberg.net.
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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