The premium differential (CDS premium) between credit default swaps (CDS) that have the same sovereign debt but differ in term of currency denomiantions. For example, the quanto CDS spread can reflect the difference between the CDS quotes in dollars and euros on the same debt underlying the credit default swap. To that end, the quanto effects can account for a significant part of the yield spread between eurozone sovereign bonds denominated in Euro and U.S dollar.
This spread reflects the market’s view about the relationship between the two currencies involved. It also reflects the fundamentals of the underlying sovereign.
