This is trading over 50bps now. Thats wide for the worlds reserve currency (used to be around 5) Its even wider than France CDS, which is a strange state of the world if you ask me. What happens if this thing is suddenly trading at 85? the USDs uptrend would break and collapse I imagine, along with this huge rally in US long bonds
I was actually just thinking about the US CDS and how everyone says they’re worthless because they’re denominated in US Currency which would devalue as well. But I was thinking that if you are the ultimate bearish investor, the trade should be considered as part of a series of positions. For instance, you could purchase CDS protection of US treasuries, and then enter into matching futures currency (or even gold) contracts to take a full short position on domestic risk. There have been extreme bearish talk of a potential US government financial meltdown within 20 years due to the combined effects of social security, medicare, medicaid, and now an $8.X trillion bailout plan compounded by a weakening economy (I’m not advocating a view here just using it for an example). In a similar situation when Russia defaulted in 1999, they only defaulted on the foreign denomonated sovereign debt, and inflated heavily (by printing worthless money) to pay their domestically denominated sovereign debt. If you held this view, using the transactions above you would be completely hedged (barring counterparty risk, which could be partially shielded by using foreign banks such as HSBC for counterparties) against either event. I just thought it was interesting. Probably something you guys all knew, but I was pondering it earlier and thought I’d seek feedback.
the problem i have with buying UST CDS is counterparty risk. I don’t understand how a CDS dealer (GS, DB, BofA, Citibank, etc) can sell CDS on anything with less spread then their own. Can you explain the logic in that, other then pure speculation with intent to close out before the event happens…
I guess the view is that if you use stable foreign banks as counterparties, the CDS spreads on US Treasuries could potentially widen to be more than their own CDS spread prior to default.
here’s what you do… buy a CDS on UST from Societie Generale… then buy a CDS on French Treasuries from BOA… that way, one country will default first and its corresponding bank will as well… but the bank in the other country will likely survive… you could buy more CDS on these banks and spread the risk around… The bottom line is that if this doomsday scenario happens and you actually cash out, I would immediately buy some hard assets (farms, useful hard assets) as the world will likely fall apart (should BOA, SG, France and US all go bankrupt). I would also buy loads of security forces and finance your own coup for world dominance. but in seriousness, black swan’s argument is reasonable for the USD hedge. what if you just bought a CDS on a foreign bank with large US operations, thereby skipping much of the currency risk and cashing in on a currency that will likely appreciate, compared to the USD at least.
Serious question: What does it mean when UST CDS are at all time wides and the 10-year is at all time low yields? My answer: These CDS are meaningless.
NakedPuts Wrote: ------------------------------------------------------- > Serious question: What does it mean when UST CDS > are at all time wides and the 10-year is at all > time low yields? > > My answer: These CDS are meaningless. The historic yield comparison is a relative measure, whereas the CDS spread is fundamental so its not meaningless. Similar to how multiples may indicate an asset is relatively underpriced, but in truth the whole sector may be overpriced, making it more overpriced. In other words, the ten year yield could be low because its deemed the most secure investment in a time when there is little security anywhere so investors are driving the yield down. However, if the probability of bankruptcy has systemically increased throughout all asset classes (very realistic assumption), the CDS spread could widen at the same time.
Perhaps all CDS are overpriced because no one really knows how to price these things?
I don’t think its that hard to price a CDS considering the age and complexity of the insurance industry. That being said, I can definitely agree that they could easily be mispriced based on invalid assumptions (which I think is what you’re suggesting).
Technically, at under 2bps in 2007, USTs were risk-free. How do you attempt to price something that was once thought to hold a value of next to zero? Like we were talking about before, everyone’s probability of default will be different, very different as the thought hasn’t crossed the minds of 99.99% of people in the business before. Maybe the increase in credit risk is truly natural in a deflationary environment. Instead of moving your equities to cash or low yielding govt fixed income, buy UST CDSs which are very cheap (?) to hedge your portfolio. You don’t have to hold the CDS until there is default, just until the probability of default is high enough to make money on it without having to go too deep into counterparty risk with the situations we talk of should there be UST default.
Where do you guys get quotes for CDS on UST?
tobias Wrote: ------------------------------------------------------- > Where do you guys get quotes for CDS on UST? bloomberg, a dealer gives me live quotes.
Thanks, was wondering if there was a generic bberg ticker. Guess not.
There is. Type SOVR into bbg and go from there. Quotes are a bit stale, but good indication and you can pull up the chart etc
its priced by the marginal buyer, who is probably a stressed out US bear. i.e., its not trading at its fundamental value. there is no competing pole in the world right now other than the US, everyone else is screwed even worse (except maybe Japan). are you sure these are for USD treasuries - does the US borrow in Euros or Yen, and could these be for those? how can the US possibly default on USD treasuries? thats absurd. who would pay for such protection?
Countries do default on sovereign debt. Despite what some earlier poster wrote, the Russian default in 98 was about defaulting on its domestic debt. The issue is that sometimes the govt can’t issue more debt without debasing the currency in an unacceptable way. If this happens the gov’t needs to restructure. If you are holding CDS, you don’t need to particpate in that restructuring. I can come up with a bunch of really implausible scenarios in which that happens and the CDS are still creditworthy.
JoeyDVivre Wrote: ------------------------------------------------------- > Countries do default on sovereign debt. Despite > what some earlier poster wrote, the Russian > default in 98 was about defaulting on its domestic > debt. > > The issue is that sometimes the govt can’t issue > more debt without debasing the currency in an > unacceptable way. If this happens the gov’t needs > to restructure. If you are holding CDS, you > don’t need to particpate in that restructuring. I > can come up with a bunch of really implausible > scenarios in which that happens and the CDS are > still creditworthy. yeah, this is what i wonder about… i mean, would zimbabwe’s inflation itself constitute a credit event? (ignoring whether they’ve actually defaulted on foreign debt)… the whole CDS on UST just seems very murky… did russia really default because they had a hard time issuing any rubles? and doesn’t USD benefit from being the reserve currency? which the ruble wasn’t. i’m asking, i don’t know the answers to these questions.
as per an earlier poster, i do somewhat wonder about a 400 bp CDS broker insuring a 60 bp super-safe credit. surely the broker will go before the U.S. government, for instance.
westbruin Wrote: ------------------------------------------------------- > as per an earlier poster, i do somewhat wonder > about a 400 bp CDS broker insuring a 60 bp > super-safe credit. surely the broker will go > before the U.S. government, for instance. yep seems to me the payer would be getting 60 bps worth of protection for 400 bps of exposure… don’t get it. someone mentioned adding more CDS on the dealer, but that just adds to counterparty risk, not reducing.
convert, sorry for not giving you specific credit on the broker insuring government (for example)… and obviously that’s why AIG was so popular for issuing CDS. i feel somewhat stupid asking but are CDS generally marked to market with payments made when limits are reached. or is that one of the biggest reasons why we’re in this mess?? i.e. people just assumed AIG, citigroup etc. were good for the issuance??