BNP Paribas Has a Lower Probability of Default Than Australia

Scroll past the screen shots for all of the jaw-dropping take-aways.

BANK 12.9.08

Bloomberg Screen Shot: BANK 12.9.08

SOVR 12.9.08

Bloomberg Screen Shot: SOVR 12.9.08

SOVR (USA CDS) 12.9.08

Bloomberg Screen Shot: SOVR (USA CDS) 12.9.08

USSW 12.9.08

Bloomberg Screen Shot: USSW 12.9.08

1) BNP Parabas & Credit Agricole are currently being priced for a lower rate of default than Australia.  (This fluctuates a bit)

2) Senior sovereign debt from Germany, Japan and France is now safer than US Treasuries.  The number of countries now considered safer than the US is growing.

3) It used to cost about 8 bps (basis points) to insure 5-year treasuries, just as of last April.  Now that number has ballooned to 66 bps.  ($66,000 for every $10 million in face value)

4) 8 bps on a 4.0-5.0% yielding note is a nominal amount at/or less than 2% of the income.  66 bps on a note yielding 1.58% is a substantial price.  Essentially the cost of insuring 5-year treasuries has jumped from less than 2% to over 40% of the yield.

5) The “risk-free rate” now has a new definition: treasury yields minus the cost of insuring them from default.  In that case the new risk-free rate on December 9, 2008 for 5-year treasury notes would be 1.58 – 0.66 = 0.92% or 92 bps.

6) Nobody likes the bailout, but for god sakes if you have to do it, please take advantage of the demand for treasuries and issue a boat load of debt while the 10-year is at 2.6% and the 30-year is at 3%!!!  Said another way, if you have to mortgage our grandchildren’s futures, and there is little choice on that matter, don’t be stupid: take the 3% 30-year loan now!

7) The “real” inflation-adjusted risk-free rate, using the new calculation method from above would leave us with a “real” risk-free, 5-year t-bill yielding -1.28%, assuming you can swallow the inflation estimate of 2.2% which excludes Food and Energy.  Computed as follows:

Current 5-year treasury yield: 1.58%
Cost to insure a 5-year note: 66 bps
Insurance adjusted risk-free rate: 92 bps
Subtract the CPI (Ex Food & Energy): 2.20%
Real (inflation-adjusted) risk-free rate: -1.28%
Realization that the world you once knew has been turned upon its head: Priceless

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