A reader sent along a very interesting email, which I thought I'd share with all of you:
Dear Prof. Bainbridge,
Here are a couple of other data points.
Closing CDS (credit default swap) prices on German debt = 32.67 basis points; on US debt sovereign debt = 34.74. Forget about agency ratings; the CDS market gives a much more accurate and timely view of credit quality. So right now the markets view German sovereign debt as slightly less risky than US debt despite the pending collapse of the Euro.
A number of corporates now have CDS prices lower than US treasuries. As you note, this is unprecedented. Here is what I've found:
CDSs on Samsung Electric (a Korean corporation) debt closed at about 32, the same as Germany.
Burlington Northern (Warrent Buffet's RR), CDS pricing @ 16.77. Burlington Northern is the new risk-free security. It's nice to be the chief crony in a crony capitalist society.
I noticed last week that Chevron was also viewed as safer than US treasuries but I don't remember the pricing.
A month or so ago Norfolk Southern CDSs traded at 33.70 and CDSs on US treasuries at 42.85. Subsequently, US sovereign CDS prices dropped quite a bit when it looked like Romney had a chance. I don't know what happened to Norfolk Southern.
In any event, CDS prices on US treasuries have gone up (meaning credit quality has gone down) by over 5 basis points (about 19%) since the election.
Note, however, that CDS pricing does not scale in any obvious way. Compared to the prices for German and US CDSs, the current prices for CDSs on MBIA are around 3,000 basis points per year (that means if MBIA doesn't default, you'll pay 150% of the face amount of the insured debt in premiums over the five year life of the CDS); and for Argentina, about 1,825 basis points per year. I can't find Greek sovereign CDS pricing.
Last point: in my view, default is not a likely option for the US. It's just not necessary. It is far more likely that we will pay our debts through inflation in the manner of other overly indebted countries throughout history. That risk will eventually be reflected in treasury yield but not in CDS prices, which are pure measures of default risk.