U.S. default costs fall on debt deal hopes

October 11, 2013

LONDON, Oct 11 (Reuters) - The cost of insuring against a U.S. debt default dipped on Friday as prospects politicians in Washington will reach a deal to lift the country's debt ceiling gathered pace.

Five-year credit default swaps tightened 10 basis points on the day to 30 bps while one-year CDS was 7 bps narrower at 60 bps, according to data provider Markit.

Still, the fact that one-year CDS was twice the rate of the five-year contract reflected lingering doubts that a deal to raise the country's borrowing limit will be reached by Oct. 17 when the government will effectively run out of cash.

In normal circumstances, it is costlier to buy longer-term credit protection. The current curve inversion - considered a classic sign of credit stress - reflects investors' concern over a looming default.