LONDON, Oct 9 (Reuters) - The cost of insuring one-year U.S. government debt against default rose on Wednesday to their highest since July 2011, widening the gap over five-year rates.
One-year credit default swaps widened by 7 basis points to 60 bps, according to Markit. They now trade 10 times more than their level at the beginning of September.
A lack of progress in U.S. budget talks is fueling concern in financial markets of the possibility the deadlock could extend to Oct. 17, when the government will effectively run out of cash.
Hitting the $16.7 trillion borrowing limit could lead to an unprecedented U.S. default which could wreak havoc in global financial markets.
One-year CDS were now trading 22 bps above five-year rates, considered a classic sign of stress and reflecting investors' concern over a looming default.
In normal circumstances, it is costlier to buy longer term credit protection and yields on longer-dated debt are usually higher than on bonds maturing in the near future to compensate for the risk of holding an asset for a longer period.
Yields on one-month Treasury bills traded near 2-year U.S. T-note yields on Tuesday before retracing. One-month T-bill yields were last at 0.27 percent with 2-year T-notes yielding 0.37 percent.