Earlier this week, I pointed out in a column that the cost of insuring the US government against default in the credit derivatives markets is now higher than for many major companies. More specifically, data from Markit shows that no less than 70 US corporate names currently command lower credit default swap spreads than the sovereign contract (currently running at 50 basis points.) A few years ago, there were none.
Unsurprisingly, that observation prompted a flurry of e-mails: some readers suggested that this pattern simply demonstrated what a poor guide CDS prices can be; others argued that it showed instead what a poor job American politicians were doing in relation to US debt.
However, one of the most interesting observations came from Bruce Tozer, a senior official at Crédit Agricole Investment Bank, who suggested that the most important aspect of this swing is that it should force investors to rethink their concept of the “risk free” rate.