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.
Why not Soros? Already did it to the Pound.
It sounds like it is probably someone connected to the rating agencies themselves. After all...wouldn’t it be someone at the rating agency that would know for sure whether they are going to drop our rating or not?
Someone needs to go to prison for this!
The subject is flash mobs and wilding. That’s what you posted and warned about.
Listing robberies and assaults from a daily police report aren’t flash mobs.
“He not only knows the Democrats’ position, he decides what it will be.”
This regime is so corrupt, I wouldn’t put it past them to position Soros to make $10B with an understanding that say, 10% of his ill-gotten gains be funneled back to the Obama 2012 campaign. This certainly would explain why Obama seems to be the single biggest barrier to getting a deal done.
Or even worse, someone like George Soros or his two sons that run Soros Fund Management getting "insider" information from corporate management at Moody's and Standard & Poors and using President Obama--their "toadie"--to deliberately crash the US economy so they could swoop in a buy highly distressed stocks and real estate at very low prices and when the economy starts to recover, sell them at IMMENSE profits to themselves? The Soros family have become the most ruthless investors since the days of the "robber barons," using the same style of ruthless investing that made Joseph P. Kennedy, Sr. gigantic profits (the Kennedy clan patriarch went from being worth US$4 million in 1929 to US$180 million in 1935, a 45-fold increase in family wealth).
If the issue were only us...shorting the bond is a good decision. HOWEVER....on the other end of the balance beam is an uglier bear...the Euro. As long as that bear is uglier than the dollar-and it is-shorting the bond market might not be such a good idea.
Not a trader...just play one...
The ignorance in the "article" is astounding. For instance:
This had the hallmarks of one of the largest bond shops in the world knowing something the rest of the market didn't.
Ah, no it didn't. 10-year Treasuries routinely trade between one and two MILLION contracts per day. The 30-year between 200 and 400K per day.
5,370 10-years and 3,100 30-years is simply no big deal, trades of those sizes and larger routinely happen ALL DAY LONG. There are literally thousands of entities which could have made these trades.
Then there's:
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.
It means nothing of the kind. The total margin requirement for the two trades would be, AT MOST, $23.5 MILLION, not one billion. So, the guy is off by a factor of about 40.
(5,370 10-years at $2,422 each and 3,100 30-years at $3,386 each. Those are exchange minimum margins for speculators, which is the highest rate that these trades could have been margined at.)
trader confident that it could make 10 billion
This is at least as ridiculous as the "$1 billion" garbage. The entire value of the short position was $1.05 billion. If the value of all US Treasury securities fell to zero (making interest rates infinitely high, an impossibility) the maximum potential profit to the seller would be $1.05 billion. Not $10 billion.
If rates rose to the 20% area, putting the 30-year somewhere in the 60 area (I'm guessing from memory, it's been about 30 years since rates were that high,) the maximum profit would be around $.5 billion. Only off by a factor of 20 or, in the more likely event that they were looking for an interest rate spike of 1%, off by a factor of perhaps 400 or 500. As in a profit of $20-25 million versus $10 billion.
Not to mention that on Thursday, July 21, there was no spike in volume at all in any Treasury futures contract beyond the usual slightly-higher 9AM-hour (when pit trading opens, the electronic version trades virtually 24 hours) volume. The 10-year traded its usual 100-300K per hour and the 30-year traded its usual 25-75K per hour.
And, not to mention that whoever executed this particular set of short sales has spent most of the time since losing money on them, and as I write this is about even on the trade, assuming that it's still open.
And, not to mention that this seller could quite likely have been a cash market dealer who was hedging part of their cash market long position, in which case their margin requirement would approach zero along with their net profit potential and expectations.
Yeah, that was some panic.
This "article" was written by an idiot who is largely ignorant of the futures markets and who was repeating idiocy concocted by someone else who also had no idea what he was talking about.
Worse is the fact that no one has pointed out exactly why this article is a total and absolute joke.
Now, we may or may not temporarily lose our AAA rating.
In any case, the problem can't be solved until the jug-eared, narcissistic, excuse-making, lying, inexperienced, economically illiterate socialist is thrown out onto the Jimmuh Carter trash-heap of totally failed presidents in 15 months or so, along with enough of the liberal idiots in the Senate to render the liberal spenders totally powerless to continue their lunacy beyond the next trillion or two.
BTW you have a great way of explaining it!!! Thanks! I sent your response off to some other folks who picked up on this story and got freaked out!!
Thanks, very clear.
Wondering if the huge rise today in the short term tbills’ yields is related to debt ceiling plays.
You're welcome.
And that's a good thing. There's way too much garbage circulating on the internet that has no basis in fact. This thread is a good example, about 90% of the responses probably being much like the ignorant reactions of the folks you mention.
I've been trading this stuff for over 40 years. I rarely post anything unless it's a case of utter economic or futures-related rubbish, like this one was.
That presents a problem in that the moderators then think that my strongly stated and factually-based opinions amount to merely trashing some economic illiterate (which is usually true) instead of being an effort simply to disabuse people of tin-foil hat notions.
While I see a lot of junk here that cries out for a response, most of it simply isn't worth more than a laugh, never mind the effort to respond. This ridiculous "article" screamed for a response.
You're lucky that you saw my response at all since I'm now "moderated", after 11 years here, which inspires me to just not bother 99% of the time.
I understand.;-)
Sorry, I call it how i see it. If the government would have let the forces of economics run theri course we would be on our way to a better economy. Letting Goldman and Morgan Stanley become banks on Thursday so you could save them on Sunday, and such prolonged what has to take place.
Sorry, I call it how i see it. If the government would have let the forces of economics run theri course we would be on our way to a better economy. Letting Goldman and Morgan Stanley become banks on Thursday so you could save them on Sunday, and such prolonged what has to take place.
Who? Anyone who wants free protection from the mightiest military on earth, and anyone who wants to dump their useless trinkets on our markets ... pretty much, China and the rest of the world!
What is more important than return “ON” is return “OF”. 30 year Bonds are the few investments that you are getting a positive return. If this economy falters from here the 4.29% yield will look great.
Yep..your scenario is entirely probable. I also think that the whole 2008 crash and market scare was also orchestrated by corrupt corporate toadies, democrat socialist/communist thugs, Soros and Obama’s handlers. There is something very wicked in our country right now and it is going to have to be torn out root and branch in the next election if we are to survive as a country that is free. Next stop is full blown communism if something isn’t done.
So, as I write this, if the trades referenced in the article are still open, the loss this genius has run to this point is about $2,500 on 5,370 10-years and $4,500 on 3,100 30-years.
That would be a total loss of about $27.4 million.
More than the total initial margin. So much for the billion dollar trade.
Jim Rogers walked away from America.
Who cares what he says.
In globalism, the “forces of economics” are primarily bribery.
We need to stop naively believing in magic.
America will continue to implode, until we look out for ourselves. First.
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