Moody’s Analytics, a group separate from Moody’s Ratings team, published a recent report (dated 2/3/14) on PR’s CDS-derived probabilities of default::
“Market-based probabilities of default for Puerto Rico have continued to deteriorate since the beginning of the year. The commonwealth’s five-year cumulative CDS- implied EDFTM (Expected Default Frequency) credit measure, for example, rose from 15.86% on December 31 to 20.81% this past week (Figure 1).1 Puerto Rico’s one-year EDF measure is currently 4.63%, exceeding that of all US states and sovereign entities in our data set except Argentina and Venezuela (…)
In addition, the difference between Puerto Rico’s one-year and five-year annualized CDS- implied EDF measures has inverted in recent days.
An inverted yield curve may indicate that investors are concerned about an issuer’s near-term refinancing risk. In that case, an issuer’s debt often begins to trade based on a dollar price that indicates an expected recovery rate, rather than on a yield spread linked to a particular maturity. When two bonds with roughly the same coupon are trading at roughly the same dollar price, the one with the shorter maturity generates a higher yield than the bond with the longer maturity.”
You can download the full report, written by Jerry Tempelman and Xian Li, at Moodys.com.