And why would you buy credit protection on GM debt, if there’s no such debt outstanding? Maybe you intend to buy bonds when GM issues them, and you want to lock in protection now, while it’s cheap. Maybe you are a GM supplier, or you have exposure to one, or in some other way you have GM counterparty risk which is easy and cheap to hedge at the moment. Maybe you’re just taking the opposite side of the GM-Ford relative-value trade featured in the WSJ, betting that over the long term GM is going to continue to struggle in the face of steadily declining US market share. Or maybe you just reckon the price of credit protection on GM debt is going to go up rather than down.

Whatever the dynamics of GM CDS trading, however, this kind of extrapolation is a reach too far:

If the cost of protection on GM continues to trade below Ford, for example, GM should be able to sell bonds at lower yields than Ford.

It’s bizarre to see this at the end of a whole article dedicated to the weirdness of the market in GM CDS, and the fact that the price is largely a function of the fact that GM does not have any bonds outstanding. At some point, GM is going to start issuing new bonds, and at that point various different investment banks will start talking to the carmaker about the level at which they might be priced. I very much doubt that any such bank would tell GM that it could issue through Ford just because of where the two companies’ credit default swaps were trading.

For the time being, GM CDS are trading at a tight level precisely because no one’s expecting a bond issue any time soon. If GM starts making noises about raising money in the bond markets, expect those CDS spreads to widen out significantly. It’s still possible that GM bonds could trade through Ford, of course — after all, Ford would still be much more highly leveraged than GM. But let’s not take today’s CDS market as much of an indication of anything. It might not be financial alchemy. But that still doesn’t make it a particularly useful guide to future bond pricing.

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Felix Salmon is an Audit contributor. He's also the finance blogger for Reuters; this post can also be found at