The government's $25.9 billion of bonds due in February 2039 traded at 87 percent of face value, meaning swaps buyers would be paid 13 percent to settle the contracts.

"Even under a scenario of failure to raise the debt ceiling, we view default a lower likelihood outcome relative to payment prioritization," Jeffrey Rosenberg, a credit strategist at Bank of America Merrill Lynch in New York, wrote in a note to investors. "Such an outcome however implies a government shutdown and the negative economic consequences of this would weigh negatively on credit spreads, albeit less than that under the dire version of the 'default' scenario."

While credit swaps signal less than a 2 percent chance the government will default within the next year, the insurance contracts are the most expensive they've ever been. Swaps insuring Treasuries for one year cost a record 80 basis points yesterday, according to CMA, up from 46 basis points last week and 23 at the start of the year.

One-year contracts surpassed longer-term insurance for the first time this week and are now more expensive than Saudi Arabia, Belgium, Turkey and Thailand, CMA prices show.

Five-Year Swaps

Five-years contracts are trading at 63.5 basis points, the highest level since March 2009, and signal a 5 percent chance of default within that time, according to CMA. That compares with 37 basis points in April and a record 100 basis points at the peak of the financial crisis in 2009.

Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

"If CDS is triggered, you'd get paid out but then your protection is gone," ISDA's Geen said. "Your protection would effectively be knocked out and settled and if you had to re- hedge, it could cost more."

Notional Value

Swaps on U.S. debt are relatively new, having only been tracked by CMA since 2007, when they cost less than 10 basis points a year. Trading is still low compared with outstanding securities. While the notional value of protection has increased 57 percent this year, the amount is only 0.05 percent of total marketable U.S. public debt.

Swaps on the U.S. also cover a fraction of contracts on European governments. Italy has $25 billion of swaps outstanding, the most in the world, followed by France with $21 billion and Spain with $18 billion. Swaps on Germany cover $16.5 billion and the U.K.'s protect $12.3 billion.