I've heard of CDS trading on US Govt Issued debt at around 70bp currently. Can anyone shed some light on the trade details and the actual theoretical valuation for how one would come up with this spread? Is the premium paid in euro? This should be especially interesting given that the 30Y US swap rate is well through the 30y bond yield. What should the 30Y cds market be, if one existed?

I think sovereign CDS trade in a currency other than their own. e.g. US CDS trades in Euro and Spanish CDS trades in USD

I see US trading in USD

it is interesting to note that while the us cds has rallied (algong with all other sov cds) the yield on ust has fallen substatially (zero rate for short paper). i dont know how to make sense of this. investors seek the safe haven of gov debt (especialy ust) while at the same time the risk of that debt goes up). compare to euro zone where sov cds has rallied along with debt spreads against germany (the safest of the euro countries). is this looking good for gold? if people are desperate to park cash in risk free assets and these risk free assets are in fact running out (since all debt is risky) is gold going to go up? obviously you take extra market risk but what will happen if there are is nowhere to park the cash? just some thoughts..

In order to get an idea on how cds on high quality sovereign trade take a look at where 10 year OIS - treasury is trading. today it is deeply negative for us, uk, france etc.

As I keep telling everyone, relative value is no more. If you have a trade that has more than one leg, say goodbye to your pnl. This is just one example of things out of whack. There are so many of these fundamentally wrong things out there, it's beyond funny. However, it's completely irrelevant, as correction is not coming any time soon, methinks (actually, my secret, desperate and misplaced hope is that it's all about year end and 2009 will make things better). Just my 2c.

QuoteOriginally posted by: freddiemacit is interesting to note that while the us cds has rallied (algong with all other sov cds) the yield on ust has fallen substatially (zero rate for short paper). i dont know how to make sense of this. investors seek the safe haven of gov debt (especialy ust) while at the same time the risk of that debt goes up). compare to euro zone where sov cds has rallied along with debt spreads against germany (the safest of the euro countries). is this looking good for gold? if people are desperate to park cash in risk free assets and these risk free assets are in fact running out (since all debt is risky) is gold going to go up? obviously you take extra market risk but what will happen if there are is nowhere to park the cash? just some thoughts..Something that came into my mind...counterparty risk? moral hazard?If the US defaults the seller of the cds won't be here to pay you anything. So he's collecting a fee for something he'll never pay in case of default

Hi! Why does everbody assume that if the US defaults there will be nobody there to pay on the CDS? I know a US default would be a humongous thing but is it really fair to assume that nobody would be able to pay just like that?

If the US Treas defaults then it surely would mean the US economy was wiped out... I can't imagine anyone left following the doom's day in the US.Anyway, have you checked the nationality of the counterparties that are willing to buy/sell CDS on the US?The US can print USD so how can they default in USD? I can't see how... Anyway, if they default in the treasuries I can't remember a country able to argue with all the US nukes Maybe only the russians or chinese...

QuoteOriginally posted by: BullBearIf the US Treas defaults then it surely would mean the US economy was wiped out... I can't imagine anyone left following the doom's day in the US.Sure, a sovereign default makes a bit of a mess, but I don't see why it must necessarily destroy the domestic economy. In fact, wouldn't a default kill the value of the USD and make exports extremely cheap? And wouldn't it force Americans to source locally, thus increasing domestic employment? Ugly, yes, but not wiped out.BTW, is hyperinflation a "credit event" in sovereign CDS contracts? That form of "default" seems the more likely scenario at the moment.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: BullBearIf the US Treas defaults then it surely would mean the US economy was wiped out... I can't imagine anyone left following the doom's day in the US.Sure, a sovereign default makes a bit of a mess, but I don't see why it must necessarily destroy the domestic economy. In fact, wouldn't a default kill the value of the USD and make exports extremely cheap? And wouldn't it force Americans to source locally, thus increasing domestic employment? Ugly, yes, but not wiped out.BTW, is hyperinflation a "credit event" in sovereign CDS contracts? That form of "default" seems the more likely scenario at the moment.So, in the event of hyperinflation, you receive worthless hyperinflated currency. Doesn't sound like a contract many people would care to own. However, if it paid out in guns, gold and SPAM, I'd be in.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: BullBearIf the US Treas defaults then it surely would mean the US economy was wiped out... I can't imagine anyone left following the doom's day in the US.Sure, a sovereign default makes a bit of a mess, but I don't see why it must necessarily destroy the domestic economy. In fact, wouldn't a default kill the value of the USD and make exports extremely cheap? And wouldn't it force Americans to source locally, thus increasing domestic employment? Ugly, yes, but not wiped out.BTW, is hyperinflation a "credit event" in sovereign CDS contracts? That form of "default" seems the more likely scenario at the moment.If the US Govt were to default then perhaps it would be because their economy was already in a really really bad state. Anyway, why would they default in USD debt? If they were in deep shit then the USD would become naturally undervalued against other currencies (survivors) without the need of a US default. They can always print USD and repay the debt.A credit event on Sovereigns is a failure to pay, debt restructuring, etc... As far as I know hyperinflation and deflation are not credit events. If that's the issue it would make more sense to buy a CDS on US debt issued in EUR not on USD. But I don't think the US will need to issue debt in foreign currency in the near future...Anyway, why buy a CDS on US debt for hyperinflation fears? Short USD instead!I've found a really interesting article on Financial Times Blog about this topic. Check it out! It's really focusing on what we've been discussing here.The mystery meaning of sovereign CDS

QuoteOriginally posted by: BullBearAnyway, why buy a CDS on US debt for hyperinflation fears? Short USD instead!I've found a really interesting article on Financial Times Blog about this topic. Check it out! It's really focusing on what we've been discussing here.The mystery meaning of sovereign CDSThanks for the great article.Perhaps these CDS price the chance of a serious bout of deflation. Although inflation is the more likely event, that doesn't imply that a deflationary spiral has a 0% chance of occurrence. I also liked explanation #5 that these CDS are just another opportunity for speculators to play another market. Clearly, sellers have a reason to offer these instruments -- it appears to be free money for them. Perhaps this is a case of "if you structure it, they will buy."Shorting the USD to cover inflation-based soft defaults would only work if hyperinflation is localized. In a correlated economic collapse, a substantial majority of developed world currencies might "lose value" and thus the USDEUR might remain constant even as both regions suffer serious hyperinflation. One might, instead, buy gold or other commodities, but commodities conflate both demand risks and inflation.One could also argue that the price of a sovereign CDS, which should be discounted to reflect counterparty risks, is a measure of differential default. To the extent that people believe that some global counterparties are, essentially, more stable than any of the countries they do business with, then these sovereign CDS have value.

One last question: what is the volume and open interest in these contracts?Just because there's a price in the market for these doesn't mean that anyone is actually buying and selling them. If the volume and open interest is low, the prices might reflect the illiquidity of the market and the idiosyncrasies of a few irrational buyers.

According to DTCC (they cover 90 % of the market according to themselves) there are net USD1,2 bn referencing USA (gross 4,8 bn over 119 contracts) and net USD 2,5 bn referencing UK (gross 12,8 bn over 480 contracts). very small numbers when compared to the UST and gilts markets. you can check out the numbers on DTCC's website.It looks like a good idea to sell protection on those names. but perhaps that is how AIG thought when they wrote all that protection that later blew up in their face?