NEW YORK, Nov 24 (Reuters) - The spread or risk premium on 10-year U.S. Treasury credit default swaps hit record wide levels on Monday, prompted by worries about how the cost of rescuing banks and carmakers would affect U.S. creditworthiness, CMA DataVision said. As the global financial crisis worsened in recent weeks, traders increased their bets on the bigger toll of the U.S. government’s array of programs to help these ailing industries. Ten-year U.S. Treasury CDS edged out to 49.8 basis points from 49.3 basis points at Friday’s close, according to the credit data company. Five-year Treasury CDS grew to 43.5 basis points versus 43.0 basis points late Friday, it said. The risk premiums have nearly doubled from levels seen two months ago after the collapse of Lehman Brothers. Prior to the financial crisis, default risk premiums on U.S. government debt had been running in the low-to-mid single digits.
I think this is my favourite thing to track over these tough times. If that Russian guy is right, this spread will fully reflect the panic that would occur, its already begun in my opinion. Who would give up that much of their treasury yield to protect from default? My superiors believe it is purely speculation.
Who do you buy protection on the US Treasury from? God?? What counterparty’s financial security do you feel rosy about if the CDS spreads on treasuries go to points up front? This is a bizarre thing for people to speculate in.
I’m assuming the speculation would be to boost the cost from 2bps to 200 bps and sell off to holders of treasuries when ish hits the fan. This was something we identified in a previous post, what counterparty would exist when ish hits the fan? ICBC maybe? But likely not if they are selling CDS on US treasuries…
The Gov’t cannot go bankrupt since they control the printing press. You are basically guaranteed to get your nominal money back, it just might not have any real value at that point.
200bps? They can just print more money. Is that a good solution? F@#* no, but they won’t default. Plus, there’s no point for americans to financially hedge against a collapse of the US Government. If that that Russian dude is right, we’re talking Mad Max Beyond Thunderdome $**t. Screw the CDS and load up on guns and IROC Camaros. You’ll have bigger problems than portfolio shortfalls.
My understanding is that they won’t print all the money they need to pay off treasury debt as that would murder the currency and they would be pulling the trigger themselves. Letting the treasury dept go bankrupt with a high recovery rate in the notes that can’t be paid may not send the world economy to its grave. I find it interesting how many people on this forum say that the govt can print money as if it has no repurcussions on the rest of the economy.
Intersting CDS spreads: http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2008/11/25/bankruptcy_update_britain_plus_california By the way, my colleague Yvette Essen showed me the CDS data on some of the US states. These are quite revealing too. Michigan 192 California 165 Nevada 164 New Jersey 150 Ohio 104 So, California is now priced as a greater bankruptcy risk than Slovakia 150.