According to MSCI, the odds of an unprecedented US debt default have more than tripled since the start of the year. The probability of a default has soared from 3.3% in early January to 11.3% as of last week. MSCI reports that trading activity in US credit default swaps has surged as investors seek a hedge in case of a potentially catastrophic event. The US Congress has just a few months ahead to take measures to avoid such a negative scenario. The debt ceiling was hit in mid-January. Now the US Treasury needs to keep the government funded and cap the ballooning debt at the same time. Investors are getting concerned by the trading activity in credit default swaps (CDS). CDS function as a form of insurance against issuers who fail to make scheduled payments on their debt. In the event the US defaults on its debt, treasury holders will not receive their payments. What is worse, such an outcome may lead to an economic collapse and spark extreme volatility in interest rates. The thing is that much of the world’s interest rate levels are based on the idea that the US government debt is risk-free and stable. Additionally, millions of seniors will face the risk of losing their social security benefits.
