USD CDS Gone Wild

The spread between 3-month (5.14%) and 1-month (3.36%) Treasury yields has never been higher: 1.78%.

What’s going on here? There a number of theories going around, but the one that’s gaining the most traction seems to be concerns about a US debt default due to the debt ceiling…

The cost to insure against a US debt default has risen to 90 bps, a record high.

Is the US actually going to default in the next few months? Of course not. They’ll raise the debt ceiling and borrow more money like they always do.

But investors aren’t always rational, and there’s been a huge spike demand for the shortest-term Treasury security (1-month), driving its yield down to 3.36%.

Will this dip in 1-month yields last for long? I highly doubt it, unless the Fed is suddenly going to cut rates aggressively at its next meeting.

That’s not what the market is expecting at all, with the odds of another rate hike moving up to 89% this week. Historically, the 1-month has closely followed the Fed Funds Rate, meaning it should be over 5% in May.