You might assume that government bailouts would assure investors about the health of the U.S. economy. After all, the government is pulling out all of the stops to make sure that the economy recovers, right?
Actually, no. As Markit’s Miles Johnson writes:
CDS [credit default swapos] on the debt of the US government reached all-time highs on Wednesday as investors struggled to digest the government’s latest stimulus package splurge. (On Tuesday the Federal Reserve unveiled an $800bn injection into consumer lending markets, prompting further unease over the level of national debt and ballooning money supply.)
The news pushed the cost of protecting against US default over five years to an all-time high, rising 5 basis points to 49bp. The spread on ten year contracts too reached record highs, up from a close of 48bp to 53bp.
Maybe because investors are starting to understand that the U.S. is running out of the ability to raise more cash and may go bankrupt.
The U.S. isn’t alone. As the above-described article by Johnson states:
But the US isn’t the only country about which investors are increasingly concerned. Alistair Darling’s latest plan to resuscitate the UK economy has got the markets in a fluster too – UK CDS hits new highs every day.