What Do Yields Say?

Last Updated: 15 April 2024

As you know, Paul, I’m skeptical about the reliability of CDS market information … especially in the sovereign markets.

So while I loved your last feature on sovereign default risk, I’m not sure I buy what the CDS market is saying. You mention at the end, almost in passing, that CDS spreads are not necessarily reflected in bond yields. You write:

“There is the possibility of divergence (basis risk) between CDS spreads and bond yield spreads. Nevertheless, CDS spreads should give a pretty accurate reflection of the real funding costs faced by Eurozone governments.”

Is that a riddle?

It seems to me like yields are the best measure of funding costs. Why choose the derivative CDS market when you can go right to the source?

I know that a few bond auctions have failed in Germany over the past few months, and that’s a legitimate concern. But in most cases and in most countries, governments can still raise all the money they want at historically low interest rates.

Isn’t the hugely liquid bond market a better measure than the troubled CDS group? And what does that say about risk in these markets today?

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.

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