Posted on 07/25/2011 7:34:44 PM PDT by blam
The $1 Billion Armageddon Trade Placed Against The United States Bond Market
Interest-Rates / US Bonds
Jul 25, 2011
By: Money Morning
Jack Barnes writes : Someone dropped a bomb on the bond market Thursday - a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.
In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.
The massive trade wasn't placed in bonds themselves; it was placed in the futures market.
The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.
The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.
However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.
You only do this if you see an edge.
This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up.
I believe what happened is a debt-ceiling deal was done in Washington and leaked to a major proprietary trader. Everyone knows the debt negotiations in Washington have been an extreme game of brinksmanship between political parties, but now someone knows how that game played out.
This had the hallmarks of one of the largest bond shops in the world knowing something the rest of the market didn't.
The number of shops or even central banks that can take on this level of market risk is extremely small. Some that come to mind are hedge fund manager John Paulson, Bill Gross's PIMCO, and the U.S. and Chinese central banks.
Paulson already scored big - about $6 billion big - on a similar trade years ago when he bet against subprime mortgages, the investments that helped bring down Lehman Bros. and many other investors.
Whoever was behind it wanted a trade on ASAP, and didn't care about the ripples they would cause.
You can see how this trade caused fear to be unleashed in the market once it got out and the implications hit by looking at U.S. Treasuries. People who were long 30-year Treasuries panicked as they saw the huge short put on the futures market, and started to unwind their long exposure.
What you, as investors, should do now is look at the bond exchange-traded funds (ETFs) that provide a positive rate of return when U.S. Treasuries drop in value. Yields are going up sooner rather than later, if the person behind this Armageddon trade is correct.
Anyone who doesn’t think we are going to lose our AAA is S T U P I D.
Spooky Dude?
soros?
It couldn’t be Soros.
What odds do you want to give that it was Soros?
Soros.
He not only knows the Democrats’ position, he decides what it will be.
Super Scary Soros Scheme?
I agree.
I am no expert on the market. That said, I think it’s only a matter of time before interest rates rise. Who in their right mind would loan these fools in Washington more money at these ridiculously low interest rates? If you want me to loan you money, then you’d better pay me to take the risk. I don’t think it matters what “Moody’s” or “S & P” say. Who are they, anyway? Wasn’t Moody’s the one who was stamping all those credit-default swaps AAA, when any type of research would have shown they were junk?
George Soros??
Somebody is going to prison........
GS the big shorty
The rating agencies will downgrade the US when the Obama administration decides they should do so.
The rating agencies used to be independent, private businesses who issued ratings.
With the Democrats' new regime of regulation, the rating agencies have been de facto brought under the thumb of the US regulatory structure. They now exist at the sufferance of regulators and will play the tune the Obama administration wants.
If they issue a downgrade, it is because the Obama administration has determined that it is politically advantageous to the Dems to do so.
In reality, the creditworthiness of the US government was dinged some time ago by the combination of Democrat control of Congress in 2006 and the presidency in 2008 and the creation of the housing bubble, which destroyed trillions of dollars of national wealth.
For 10 to 1 stakes someone could try to fix the ratings.
And so it begins.....
They don’t call those guys bond vigilantes because they are kind and patient people willing to hope for the best.
I agree we need to loose the AAA rating and IT WILL HURT US ALL. The loss will hopefully bring some sense to Congressional spending and Zeros “dictatorial” leanings, which will hurt us worse with the collapse of the dollar.
Glad I've been buying Cold, physical and other wise.
I agree - it is inevitable that we lose our AAA rating. Jim Rogers began shorting USD last month, PIMCO began dumping treasuries long before that. The dollar is finished unless we have significant austerity measures in place this summer - we all know what the likelihood of that occurring is. China is ammused as they have been dumping USD for years — some say they’ve dumped about 1/2 of their holdings now. The dumping is actually spending in the form of long term resource/commodity aquisitions. These are a not matter of single upfront payments but payments over time, in USD. When those dollars hit the 3rd world, they will effectively be going from the deep freeze (China’s reserves) to high velocity. If we are not already in hyperinflation due to loss of confidence, this increase in velocity as latent price inflation goes to manifest will get things rolling.
That question goes out over the Blackberry - why do you think he was so insistent on keeping it?
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