Matthew C Klein, Columnist

Credit Default Swaps Aren't the Canary in the Debt-Ceiling Coal Mine

A tiny and thinly-traded market shouldn't affect our expectations for the debt ceiling debate.

September 26, 2013 at 5:01 PM UTC

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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Almost no one outside of a few trading desks had even heard of credit default swaps before the 2007-2008 financial crisis. Then the hedge-funder John Paulson used them to make a lot of money while AIG used them to lose a lot of money and now everyone feels compelled to refer to them, even when discussing political issues such as the U.S. debt ceiling. The movement in CDS rates on Treasuries, the Economist warns, is now more typical of what is "seen in distressed markets where investors are pricing in an imminent default than with otherwise healthy borrowers with long-term problems."

This is all overblown. The size of the CDS market for U.S. government debt is so small and the trading volume is so thin that there really isn't much one can learn from small short-term movements.