To insure a McDonald's bond, for instance, costs 28 basis points (i.e., 0.28% of the face value of the bond). Strangely, you can also buy CDS contracts on the ultimate risk-free asset: Treasury Bonds. Historically, Treasury CDSs have traded around 1 to 2 basis points. They closed Thursday at 25 basis points. Market participants believe that the US is only slightly less likely to default on its debt than McDonalds.
Monday, September 29, 2008
McDonald's versus the Treasury
TPS regular Thomas Johnson wrote in the comments of this post a wonderful observation that I had to bring to the forefront: