US Credit Default Swaps at Highest Since 2011 Due to Debt Ceiling Jitters

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Market concerns over the United States' debt ceiling have caused the cost of insuring exposure to its debt to reach its highest level in over a decade. On Thursday, spreads on U.S. five-year credit default swaps widened to 49 basis points, according to S&P Global Market Intelligence data, more than double the level they stood at in January. JPMorgan has warned of a "non-trivial risk" of a technical default on US Treasuries, as a showdown over US government efforts to raise the $31.4 trillion debt ceiling for the world's largest economy has sent jitters through global financial markets.

JPMorgan said it expected the debt ceiling to become an issue as early as May, and that the debate over both the ceiling and the federal funding bill would run "dangerously close" to final deadlines. The bank's US rates strategy team expects the Treasury could run out of available resources by mid-August. Treasury Secretary Janet Yellen is expected in the next few days to revise the X-date, which is the date by which the federal government can no longer meet all its obligations in full and on time absent actions by Congress, currently early June.

The debt ceiling is the maximum amount the US government can borrow to meet its financial obligations. When the ceiling is reached, the Treasury cannot issue any more bills, bonds or notes. It can only pay Treasury bills (T-bills) through tax revenue. As the deadline draws nearer, yields on US T-bills, the most sensitive to the debt ceiling debate, were again pushing higher. Deutsche Bank analysts have urged caution as they anticipate a significant portion of Tuesday's deadline day tax flows, yet to be reported, will affect the situation.

The situation is becoming more serious, with the possibility of a technical default on US Treasuries looming. The global financial markets are jittery, and the cost of insuring exposure to US debt is rising.

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