Spainish bailout. The market clearly doesn’t believe it will work

The spread on credit default swaps on 5 year Spanish government bonds has zoomed back to nosebleed levels of near 6%.

CDS are pseudo-insurance where the seller gets a fee for “insuring” the underlying in case of default. They are a prime reason our markets are so unstable and probably should be banned. But they do serve as a useful gauge of market sentiment.

In this case, a spread of 6% on supposedly safe government bonds means the buyer pays the seller $600,000 a year in premium to insure $10 million of bonds, which is pricey indeed and means people do not think bonds are safe.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.