IV Macro Policy & Sovereign Debt
CDS (credit default swap)
The annual price of insuring against a borrower's default, quoted in basis points.
How it works
A CDS is a contract in which the buyer pays a regular premium and the seller covers the loss if the borrower defaults. The premium is quoted annually in basis points: 250 basis points means insuring $10m of debt costs $250,000 a year.
The price is set by the market, not decided by a committee as a credit rating is. It therefore moves daily and reacts to news far faster than a rating does.
Sovereign CDS is usually quoted on dollar-denominated debt, and the five-year maturity is the most liquid, which is why comparisons use the five-year series.
Why it matters here
A CDS gives the market's view of a country's risk in a single number and reacts to political events within hours. A sanctions decision, an election result or a reserve drain shows up here first. Movement in developed-market CDS is a separate signal: it is where you see risk migrating from the periphery to the core.