I am having a hard time to understand the dynamics of the inverted CDS curve. (Alphaville)So, when the the curve is inverted the probability of default goes up in the near term than in the long term so does the cost of the CDS. So when the issuer defaults on a short term issue, does it not also trigger CDSs on the longer maturity issues? Thanks in advance for the insight!

when the curve is inverted it means that the probability of default is higher. when CDS start trading upfront it usually means that the market expects default imminently. the reason this happens is because the premium leg is terminated upon default. so the protection seller usually demands compensation for that. you cannot choose which issue you default on.

Many thanks DaveOne more question; what do you mean when you say "premium leg is terminated upon default"? And is there a good primer on this topic?

the way a CDS works is the protection buyer payers a premium or spread to the protection seller. this is usually on a quarterly basis. when default occurs the protection buyer pays the spread up to the accrual date and delivers the bond to the protection seller. in return he receives par from the protection seller.

Hi Daveangel - I have a question on your comment - what's the basis for the CDS curve we get from Bloomberg. Not sure I am using the right terminology , what I mean is the frequency of compounding. What I read from your post is , its quarterly basis for all data points.Lets take this example. My understanding was 6month point is simple interest , and rest of the points semi-annual compounding. Could you please help me understand. Company Name Notional Recovery 6 mo sprd 1 yr spd 2 yr spd 3 yr spd 4 yr spd 5 yr spd 6 yr spd 7 yr spd 8 yr spd 9 yr spd 10 yr spd1 ACE Ltd 80000 0.4 17.923 17.923 23.383 28.783 36.006 43.25 0 43.25 0 0 43.25

I was talking about the CDS spread ie the premium you pay for protection.