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.
If they haven’t already done so, wouldn’t it be a simple matter for the Chicoms to see this player and burn him. After all, they and the Brits are the largest holders of US debt. And they also have the cash to swamp anything the shorts can throw at them.
Crazy people ... that is an insurance policy for someone who is long futures or cash treasuries. If you were long knowing that the global economy sticks and rates are going to be near zero for a very long time. Buying the puts is to protect that long position. I recommend that traders start accumulating TYU 126 calls [ten Year Note 126 calls]on any sell-off. Once this debt ceiling is solved, and it will be, the focus is going to turn toward our sub-2% growth rate, increasing unemployment claims and cratering European debt crisis and we will realize the real problem. The second half of this year is going to be ghastly for the economy.
well Merry Christmas to you too
“I agree we need to loose the AAA rating and IT WILL HURT US ALL.”
My construction business was never so good and my private realestate dealings were never so profitable as when interest rates were 18% under Carter.
Can’t wait for it to happen again!
You’re suggesting Treasuries will be the safe haven?
Anyone who doesn’t think we are going to lose our AAA is S T U P I D.
In short, they are easily the most ruthless investors since Joseph P. Kennedy, Sr., who deliberately drove the stock market down to unprecedented levels in the early Great Depression so he could buy things like prime real estate at "distressed" prices and sell them later for immense profit (didn't he sell a bunch of prime real estate in New York City in the middle to late 1930's for this very reason?).
Armageddon? Well not quite, but we are looking at some very hard times coming.
I think that we are at the very least in for a collapse much like that of Argentina’s ( http://www.youtube.com/watch?v=7yerKMQc7-w&feature=grec_index), but as a armed society with a very large entitlement minded population our collapse will be much more violent and I see many many small business wiped out by flash mob looting, and large scale violence (look at what happened just this past Memorial Day and 4th of July weekends)we are seeing these mobs grow bolder and bolder like:
Chicago’s CBS 2’s Jim Williams reports, the problem of mob attacks downtown is much bigger than the weekend beatings, according to beat cops who wanted to remain anonymous.”
And it’s not just Chicago, but Washington DC, Las Vegas, St Paul, Philadelphia and on most major big ‘Blue’ cities are increasingly reporting such flash mobs and gang muggings. Look what happened just this past weekend in Peoria, Il:
http://peoriachronicle.com/2011/06/25/peorians-living-in-fear/
Teenage Flash Mob Robberies on the Rise:
http://www.foxnews.com/us/2011/06/18/top-five-most-brazen-flash-mob-robberies/
Rash of violence isn’t flash mobs, it’s wilding
http://www.suntimes.com/news/roeper/5826624-417/rash-of-violence-isnt-flash-mobs-its-wilding.html
Teens in a mob assault and rob Center City patrons
http://www.philly.com/philly/news/20110629_Teens_in_a_mob_assault_and_rob_Center_City_patrons.html
Milwaukee Police Go Barney Fife On Mob Attacks
http://www.620wtmj.com/blogs/jeffwagner/125017329.html
Milwaukee Mob Victim Recalls Beating ... ‘Oh, White Girl Bleeds a Lot’
I see what I call ‘Pocket Pogroms’ taking place in many big ‘Blue’ cities and if you aren’t a ‘0bamamite yute’ or one of ‘Holder’s People’ it’s going to get Reginald Denny bad for you very quickly.
For those who are just starting or are old hands at prepping you may find my Preparedness Manual helpfull. You can download it at:
http://www.tomeaker.com/kart/preparedness1i.pdf
For those of you who haven’t started already it’s time to prepare almost past time maybe. You needed to be stocking up on food guns, ammo, basic household supplies like soap, papergoods, cleaning supplies, good sturdy clothes including extra socks, underwear and extra shoes and boots, a extra couple changes of oil and filters for your car, tools, things you buy everyday start buying two and put one up.
As the LDS say “When the emergency is upon us the time for preparedness has past.”
Or as the bible says: A prudent man sees danger and takes refuge, but the simple keep going and suffer for it.
NIV Proverbs 22:3
“There is no greater disaster than to underestimate danger.
Underestimation can be fatal.”
So who took the other side of the trade?
G.E.O.R.G.E. S.O.R.O.S.
Does Zero still have that large portion of the second stimulus, that he was holding onto?
You’re recycling old news.
The Chicago cops some weeks ago waded into a “flash mob” and sent 12 thugs to the hospital.
In South Carolina, 6 thugs who beat up a white kid were charged under the state’s anti-lynching law and are facing 20 years in prison. The SC Supreme Court recently expanded the state’s castle doctrine. It’s open season on obuma thugs in SC.
The thugs are scared and hiding.
There will be no austerity. It's not politically feasible.
Politics and reasoned macro-economics are mutually exclusive.
Absent taking ALL economic decisions out of the hands of all government officials, we are certainly doomed.
When we crossed the threshold from "fiscal and monetary policy" , wh9ich were bad enough, to: "Quantitative Easing"...we jumped the shark.
That's not to say QE is the thing that brought us down. It's to say we crossed a threshold where people expect, and governments attempt to create reality from an unrealistic position.
Their motives are good but their knowledge and wisdom are severely lacking.
Not sure why we’re launching so much anger at whoever it was who placed this bet isn’t at fault. Maybe it was Soros, maybe it was Bill Gross, it could have been anybody with enough common sense to see the writing on the wall. They aren’t the ones causing our AAA downgrade.
The elected crooks in Washington are at a fault for their reckless spending, not the person who bet on it.
OK how about some updates then?
Kent shootings shift police focus to gang violence:
http://seattletimes.nwsource.com/html/localnews/2015728862_kentshooting26m.html
Five dead, 19 wounded in weekend violence:
http://www.suntimes.com/6449363-417/five-dead-19-wounded-in-weekend-violence.html
Six Teens Arrested in Weekend Robbery and Assaults:
http://www.nbc29.com/story/15142773/six-teens-arrested-in-weekend-robbery-and-assaults
Would you like more examples?
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