I know we discussed this back in the day but I need a refresher. what is the risk if those who count on US treasuries or other deemed risk-free securities to be risk-free do not hedge via CDS and there is a default/restructuring? using the US particularly, what would happen to the USD/CNY and USD/JPY exchange rates as the chinese and japanese governments are the largest holders of USTs? i would assume there would be strange currency movements due to the USD being the key reserve currency and currency peg. also, as a result of my ignorance, do many large bondholders buy cds to make their investments risk-free or do they assume the seller of CDS will default should the debt in question default? if not, who is the buyer of CDS on USTs?
I don’t think anyone really knows what will happen. I mean, this is a pretty unthinkable scenario. There will be massive contagion effects throughout the world. Japan and many European country CDS will skyrocket and many of these countries will default on their debt obligations as well. So who knows what will happen to currencies? There will also be global financial intervention on an unprecedented scale, with the potential to reshape the political climate of countries across the world. For your second question, are you talking about US CDS or CDS in general? I would imagine that 99.99% of investors don’t bother to buy CDS to hedge US debt exposure. I would not know who the 0.01% are, or if they know something that the 99.99% don’t know…
To the second question, no. Put simply, buying a CDS on all your debt would be akin to buying protective puts on all your stock positions. Sure, you eliminate risk but you also negate any return. The people that actually use CDS for insurance, and there aren’t too many of them anymore, do so for pretty much the same reason you’d buy a protective put. Maybe there are some short term issues that you’re uncomfortable with or you’re overexposed and need protection…whatever it may be. Edit: I didn’t see that last question. The buyers of Treasury CDS are speculators.
Buying a CDS is not the same thing as buying a put on your bond. CDS provide protection from credit risk only, while a put provide protection from rising interest rates. To answer your other two questions: 1 - It doesn’t make sense for China to sell UST since they will have to buy back USD to keep peg in place and avoid making exports very expensive. Unless US government becomes insolvent, this scenario will not happen. 2 - If you buy a CDS on your bond, your investment doesn’t become risk-free. Only the credit risk is hedged. You will earn RFR + other spreads (such as liquidity for ex) depending on the type of bond you hold. 3 - CDS on UST doesn’t exist since UST are considered risk free.
mik82 Wrote: ------------------------------------------------------- > 3 - CDS on UST doesn’t exist since UST are > considered risk free. Do they not anymore? They used to (see below). http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5yQoLaUYCsc
mik82 Wrote: ------------------------------------------------------- > 3 - CDS on UST doesn’t exist since UST are > considered risk free. They do exist, largely as a trading instrument rather than hedging instrument. The funny thing about these is not that they’re trading risk on what is supposed to be risk free, but rather that there’s some counter-party out there that could survive a US default.
What is the risk in selling those CDS? I would think you could just write 100m pull 180k (they were at 18 BPS at the time of that article). Who is buying those? So saudi sheek?
jcole21 Wrote: ------------------------------------------------------- > What is the risk in selling those CDS? I would > think you could just write 100m pull 180k (they > were at 18 BPS at the time of that article). Who > is buying those? So saudi sheek? I wondered that too - perhaps there are counter party collateral requirements that make it not so attractive.
The problem presumably is getting someone to buy them from you. If anyone wants to buy $100 million of credit protection on US Treasuries from me personally, please e-mail me right away. I also may have a bridge and another $10 billion or so of credit protection on US Treasuries I’d like to sell you.
Captain Windjammer Wrote: ------------------------------------------------------- > The problem presumably is getting someone to buy them from you. If anyone wants to buy $100 million of credit protection on US Treasuries from me personally, please e-mail me right away. I also may have a bridge and another $10 billion or so of credit protection on US Treasuries I’d like to sell you. This probably has something to do with it too. MTM seems like the costlier concern imo. While the market is ‘big’ (~3B net notional/19B Gross, and 689 contracts) - it’s ‘small’ compared to the CDS market (over 1T in net notional and >2MM contracts).
That is why my offer is such an elegant solution - I don’t have to mark my CDS positions to market.
jcole21 Wrote: ------------------------------------------------------- > What is the risk in selling those CDS? I would > think you could just write 100m pull 180k (they > were at 18 BPS at the time of that article). Who > is buying those? Nassim Taleb?
okay so broadly the buyers are speculators looking for a spike in the spread and institutions that see the value in true risk-free. who can sell these and convince the buyers that they can pay should there be default? AIG? HSBC? the Chinese and Japanese governments themselves, as they control the much of the fate of the US fiscal situation?
if anyone thinks the US can default they are really clueless. they can just levy higher taxes and print money ffs
Captain Windjammer Wrote: ------------------------------------------------------- > The problem presumably is getting someone to buy > them from you. If anyone wants to buy $100 > million of credit protection on US Treasuries from > me personally, please e-mail me right away. I > also may have a bridge and another $10 billion or > so of credit protection on US Treasuries I’d like > to sell you. I’ll play…I know willing to pay 35bps and sell 70 bps. $50mm UP. collateral requirements on MTM in euros, you game?
starbuk Wrote: ------------------------------------------------------- > if anyone thinks the US can default they are > really clueless. they can just levy higher taxes > and print money ffs ^ Yep. Buying CDS on US Federal debt would be straight up idiotic, since nearly everyone is in agreement that any nation with any common sense that controls its own printing would rather print $$ than default if forced between the two. A CDS would not cover this contingency which basically represents a disguised default with high payback. So you’d be buying worthless insurance. The only logical reason would be dynamic hedging or beta hedging, but if the market’s A) Illiquid and B) skewed for the reason’s I just listed, then your hedge will be pretty crappy.