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U.S. Debt Default Swaps Invert for First Time: Chart of the Day

It costs more to insure U.S. Treasuries for one year than for five years for the first time, as investors anticipate that a failure to raise the debt ceiling will prompt rating companies to declare the nation in default.

The CHART OF THE DAY shows that one-year credit-default swaps spiked to a record 80 basis points today, according to BNP Paribas SA, up from 46 basis points on July 22. The contracts now exceed five-year swaps by 23 basis points.

A political impasse in Washington could delay debt or interest payments, triggering a payout on swaps and a loss of the nation’s AAA credit rating. Longer-term debt insurance is typically more expensive than shorter-term protection, and an inversion of the swap curve signals concern there’s an imminent risk of default.

“We’re one week away from the drop-dead date and they haven’t reached solution, so technical default is becoming more probable,” said Greg Venizelos, a strategist at BNP Paribas in London. “Inversion means there’s short-term concern for default, which is exactly what’s happening in the U.S.”

Treasury Secretary Timothy F. Geithner said the U.S. will run out of options to prevent a default on Aug. 2 unless the borrowing limit is increased. The standoff increased the probability Standard & Poor’s will downgrade the U.S. within three months to 50 percent, the company reiterated on July 21.

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.

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