Protection against default costs investors less
By at least one measure, the Mouse House is a better credit risk than Uncle Sam.That measure is the credit default swap (CDS) “spread” — the fee changed by investors who agree to pay the face value of a loan instrument in the event of a default. If you want to protect yourself against the unlikely event of the U.S. Treasury going bust, it’ll cost you more than the same protection against the apparently less likely demise of Walt Disney Co. According to Strategas Research Partners, in early October, 17 U.S. corporations had lower CDS spreads than the five-year U.S. Treasury note. The only entertainment name on the list: Walt Disney. The buyer of Disney default protection would pay the seller 48.2 basis points (0.482%) of the underlying value of the loan every year. Should Disney default over the typical five-year term of the CDS, the buyer of the protection would get the face value of the defaulted loan. It’s called a “swap” because the seller of the protection gets the busted loan and hopes to collect on it eventually. Buyers of CDS protection on the five-year Treasury note would have to pony up 51.25 basis points.
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