What should we use as the risk-free rate
The cost of credit default swaps (CDSs) for 10 year US Treasury bonds have reached an all-time high, trading at as high as 24 basis points. In this regard, what should we use as the risk-free rate?
Traditionally yield on government bonds has been used as the risk-free rate. But when the government bonds are themselves not really risk-free (as the CDS rates show), what should we use? One measure I can think of is to use the yield on treasuries and subtract the CDS price from it.
Of course, this method assumes that the CDS on the government bonds has been priced properly by the market. Can you let me know how we can do better?
Traditionally yield on government bonds has been used as the risk-free rate. But when the government bonds are themselves not really risk-free (as the CDS rates show), what should we use? One measure I can think of is to use the yield on treasuries and subtract the CDS price from it.
Of course, this method assumes that the CDS on the government bonds has been priced properly by the market. Can you let me know how we can do better?