The sovereign state
While the sovereign market has in the past been most readily associated with rates investors, it has always been a key part of the credit sector, most importantly as a benchmark for the pricing of corporate bonds. But credit default swap levels on sovereigns over recent months have suggested that even the most secure names are not risk free. Matthew Attwood asks how valuable the cost of insuring a country's debt is as an indicator of risk, and if sovereigns are a new destination for credit investors
"Credit default swaps are required to determine default probabilities of debt," says a spokesperson for the CDS data and analytics firm CMA. "Even for established and secure economies there is a default probability that is not zero. You need to calculate default probabilities for a variety of trading and risk management functions and CDS are one of the few tools that you can use to do this." None of this is controversial, but is the cumulative probability that the US will default on its debt
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