Imagine a doomsday scenario where the world's most powerful governments can't pay their bills, but a few indestructible corporations keep servicing their debts right on time. Current pricing in the credit-default-swaps market suggests those survivors will be peddling medicines, soft drinks, phone service and amusement park rides.
Credit-default swaps provide big payouts to holders in the event of a default. When jitters about the creditworthiness of a country or company are intense, then such swaps are in keen demand and their prices soar. When the prospect of default is considered remote or unthinkable, then swaps can be bought or sold for a pittance.
Current pillars of strength in the swaps market include Bristol-Myers Squibb Co., Coca-Cola Co., AT&T Inc.'s main operating subsidiary and Walt Disney Co. All those companies' swaps were recently quoted at about 45 basis points, meaning that it costs $45,000 annually to protect $10 million of those companies' debt for five years.
Do investors really think a handful of multinational companies are safer bets than U.S. government? Perhaps not, says Ira Jersey, an interest-rate strategist at Credit Suisse Group AG. He points out that swaps on government debt permit only a three-day lag in timely payments before a default occurs, whereas corporate swaps allow for a 30-day grace period. So the government swaps provide greater protection, which helps make them costlier. After adjusting for that and other differences, the cost of default protection on Treasury debt is probably the lowest.
Still, the interplay between corporate and government swap pricing can provide clues about investors' anxieties. In the extreme market turbulence of late 2008, investors briefly priced Campbell Soup Co. swaps more cheaply than U.S. Treasuries. This summer, at least, no one is retreating to canned soup as the ultimate safety play.
(George Anders is a member of the Bloomberg View editorial board)