U.S., U.K. Government Five Year CDS Spreads Still in Extreme Territory

I have been using a trial of a nifty credit service called Advantage Data to look at credit spreads and risks. Here is a look at the last 3 months of the CDS prices for US and UK 5 years.

click to enlarge

Looking back over the last 3 months, it looks like things are getting better. This chart shows a CDS bid price in bps, referencing the likelihood of default of the UK and US government debt over the next 5 years.

Below is the chart with a time horizon going back a year or so ago. The message is that the credit crisis while apparently getting better is still posing extreme systemic risk according to CDS spreads. I posted this data help people think about what is going on in the credit world's view of things.

The equity markets are important to peoples perception of wealth and confidence etc. in the near term. It is the perception of risk and liquidity in conjunction with demand that actually determines how we get through this. The current plans have been greeted optimistically, but are not priced in as a full resolution to these national crises. Let hope spreads keep tightening. The Q1 US GDP could be an eye opener.

As indicators of perceived risk, the equity markets don't tell a person a lot. The CDS spreads offer a lot more information and are exhibiting strong signals that appear directionally promising, but still chronically high. Tarp V 3.5 anyone?

Here is a the same information for the G-10 from Bloomberg:

Comments

[MattZN:]

Why are you even bothering trying to compare CDS spreads? You do know that these CDSs are so thinly traded that there is basically no real market for them, don't you? Do you honestly believe the tiny handful of speculators trading this junk amongst themselves has any meaning to the outside world? All you are doing is giving them the means to manipulate the wider market with their absurdly small one by advertising the meaningless dollar amounts they buy and sell these things for.

-Matt

Apr 08 12:59 PM

[Nick Gogerty:]

The nice thing about markets is that if you disagree, you can always take the other side, assuming one is comfortable with the counter party risk. For those unfamiliar with the market. en.wikipedia.org/wiki/...

Apr 09 11:12 AM