What is the common maturity term for credit default swaps?

The common maturity term for credit default swaps (CDS) is typically around 5 years. This standardization reflects market practices where market participants prefer a term that balances risk and liquidity. A 5-year maturity allows for a period long enough to assess credit events while still being manageable for both buyers and sellers in terms of pricing and risk assessment.

This time frame is significant because it aligns with many corporate debt issuances and helps in the hedging strategies of investors who might be looking to protect their investments over a reasonable horizon. While shorter or longer terms can be found, 5 years has become the conventional benchmark that most market transactions gravitate towards, making it easier for participants to create liquidity in the secondary market.

The longer maturity options, such as 10 and 15 years, are less common as they add more uncertainty and difficulty in pricing, which can dissuade market participants. Therefore, the choice of 5 years reflects a balance of practical factors leading to its popularity as a maturity term for credit default swaps.