US and State Default Risk
Bespoke Investment Group
February 14, 2011
The US stock market has been on a tear lately, but default risk for the country has remained stubbornly high. Granted, default risk for the US is very low compared to most countries, but it is currently near 1-year highs. Below is a chart highlighting US default risk using 5-year CDS (credit default swaps) price in Euros. While risk is nowhere near as high as it got during the financial crisis in late 2008 and early 2009, it is more than 100% higher than where it was in late 2009. So while stocks have been doing well here in the US, some investors are still bidding up US CDS prices with the belief that debt problems will get worse for the country.
While default risk for the entire country has remained high, default risk for the 4 "riskiest" states (based on CDS prices) has declined in recent months. As shown below, 5-year CDS for California, Illinois, New Jersey, and New York are all down significantly from recent highs and breaking to new lows on a weekly basis.