Uncle Sam v. McWorld

The wonderful Yves Smith with yet another great post. Note that US Treasury bonds appear, ever so slightly, and in an unusual sense (reflected in value of CDS swaps, and not according to comparison with the benchmark US Treasury yields: i.e. you can’t compare US Treasury performance to itself) to be mimicking the emerging-market sovereign bonds that have been getting so hammered lately. In this light, I recall that a few weeks ago McDonald’s bonds too, were a better value than treasury bonds.

Sunday, November 2, 2008
CDS Pricing in Increasing Treasury Default Risk

We have noted that Treasuries (and the dollar) are the remaining bubbles, although some doubts are starting to surface on the Treasury front. Paul Amery at Prudent Bear gives a good recap:

The tectonic plates underlying the whole superstructure of debt have started to shift.

On the surface nothing remarkable is happening–the 30 year US Treasury bond yield recently hit an all-time low of 3.88%, as investors sought a safe haven during equity market turbulence. Yet while nominal bond yields have declined, the credit risk component of US Treasuries has been on an increasing trend since last year. According to data provided by CMA DataVision, the credit specialists, the 10-year credit default swap spread–a form of insurance contract against issuer default–has risen steadily – from 1.6 basis points (0.016%) in July 2007, to 16 basis points in March 2008, to 30 basis points in September, to over 40 basis points on October 27–see the chart below for the spread history so far this year. In other words the cost of insuring against a US government default has risen by 25 times in little over a year. Similar trends have been evident in the UK and German government bond markets.

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