Is McDonald’s now a safer bet than HMG?

Matthew Vincent

14 March 2009

Gilt prices have soared, says Matthew Vincent, but corporate bonds could offer more attractive long-term returns

‘What do you say to a former Treasury economist? Big Mac and fries, please!’ This updated version of the old 1980s joke (the original butts were sociology graduates, and any scouser in uniform) has yet to make it into wider circulation, but it can only be a matter of time. If faced with such a career opportunity, though, a civil servant would arguably be well advised to take it, for the sake of financial security. Because, if global bond markets are to be believed, McDonald’s is now a more reliable institution than Her Majesty’s Government — a fact that has implications for anyone with less appetite for risk than for cholesterol.

This unlikely conclusion emerges from the current pricing of corporate and government debt. At present, UK government stock, known as gilts, still nominally receive the highest ‘AAA’ rating from all the credit reference agencies — an accolade shared only by corporate bonds issued by multinational leviathans such as General Electric, Exxon Mobil and Microsoft, and the now-nationalised US Federal Home Loan Mortgage Corporation, known as Freddie Mac.

By contrast, McDonald’s latest bond issuance was only rated single ‘A’ by Fitch. However, the credit default swap (CDS) market tells a different story. CDSs are contracts that pay out if a bond issuer defaults — so their price, like any insurance premium, reflects the perceived risk of that eventuality. Right now, to insure £1 million worth of McDonald’s bonds against default in the CDS market costs £6,240 per year. But to insure £1 million worth of UK government bonds costs £15,710.

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