RT Journal Article
SR Electronic
T1 CDS-Implied Risk of US Delinquency: Implications for the US Debt Ceiling
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP jfi.2021.1.114
DO 10.3905/jfi.2021.1.114
A1 Ren-Raw Chen
A1 John D. Finnerty
A1 Bruno G. Kamdem
YR 2021
UL https://pm-research.com/content/early/2021/05/06/jfi.2021.1.114.abstract
AB In this article, we use a structural credit risk model developed by Geske (1977) and generalized by Chen et al. (2014) to assess the delinquency risk of US Treasury debt implied by US sovereign CDS spreads. We also use the fitted structural model to determine the implied debt ceiling for the Federal Government.TOPICS: Fixed income and structured finance, credit risk management, quantitative methods, statistical methods, financial crises and financial market historyKey Findings▪ As Treasury prices declined, U.S. CDS spreads widened sharply. As the risk of a delinquency credit event increases, the likelihood of a CDS payout being triggered also increases.▪ U.S. CDS spreads rise and become more volatile around debt ceiling impasses because of the Federal Government’s limited ability to find alternative sources of funding in the short-term when it approaches the statutory debt ceiling and its inability to raise income tax receipts quickly enough.▪ Mitigating the debt ceiling problem by cutting Federal Government spending and using the cash to pay interest on Treasury securities and retire Federal Government debt would better contribute to reducing the probability of delinquency by the Federal Government.