A few years ago, I pointed out in a column that the cost of insuring the US government against a default in the credit derivatives market, had risen above that of McDonalds, the US fast food company, for the first time.
Back then, in 2008, it seemed a shocking development. After all, Western finance has traditionally assumed that governments were the safest entities in the markets; indeed the yield on US Treasuries was considered the “risk free” benchmark. Thus paying more to insure loans to Uncle Sam than those to Ronald McDonald (or any other company) seemed distinctly bizarre.
No longer. At the end of last week, trading in the credit derivatives markets implied that no less than 70 large US companies are now considered a better credit bet than the American government, according to Markit data. More specifically, the cost of insuring US government bonds against default for five years is currently trading around 50 basis points (meaning it costs $50,000 a year to insure against default for $10m of bonds), while the cost is less than 30bp for companies such as AT&T, New Cingular Wireless and Oracle. The spread for Google, HP, Coca Cola – and, yes, McDonald’s – is also well below the sovereign spread.