The $1 Billion Armageddon Trade Placed Against The United States Bond Market

TMO ^ | 7-25-2011 | Money Morning

[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.

[AntiScumbag]

Yep..your scenario is entirely probable.

The scenario you refer to (Soros is behind these trades) has a probability of being true that approaches zero. Anyone who would propound that idea has no clue about market reality.

Read my other posts on this thread, particularly the one that demolishes the entire premise of this article.

Soros is a socialist a$$hole, but he's not an idiot.

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.

The only part of that which is right is "democrat socialist/communist thugs," which accurately describes the advent of CRA based on a bogus "red-lining" study and its massive acceleration of toxic lending from 1992 to 2005. CRA was cooked up in the late 1970s. It took 25 or so years for government meddling in mortgage markets to take its final toll.

Once again, Soros is an a$$hole, but he had nothing to do with CRA and forcing banks to make substandard mortgages, appraising homes, securitizing mortgages, rating those securities, or setting the monetary policy which enabled the RE bubble and collapse.

Jug-ears is an idiot, but he too had nothing to do with CRA and the mortgage bubble, it all pre-dated him.

Nothing was "engineered" by anyone. The accumulation of horrible Democrat-liberal-socialist policy for decades finally took its toll. Bush II is also partially responsible as he went along with increasing CRA lending "goals." Mitigated by his failed attempts to rein-in Fannie and Freddie, the failure of which was entirely due to Democrats.

You're right that the next election will be very important, but that's no reason to engage in conspiracy theory rubbish.

And "corporate toadies" is just another name for garden-variety rent-seekers. Of which there will always be too many until the size of government is reduced and they have no reason to seek an advantage from government.

[Why So Serious]

Remember this from July 25th ...

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.

I told you all last week that the focus would trun to the sub-2% growth rate and the TYU 126 calls were the buy [well last week they reported a 0.4% 1st quarter and a 1.8% 2nd quarter]. The economists are still calling for 3.82% growth on the year [PSST! we need two quarters of 7% growth to get there!]. QUIT LAUGHING, ANYTHING CAN HAPPEN! We are currently trading 126-30 and these calls are in the money. Who ever bought the puts is eating them. The economy stinks and it is getting worse. For the $7 Trillion that was spent we went from Obama we have gone from 5.5% unemployed to 9.25% [remember he would keep it under 8%, well while we were reading the bills that he post on line for 72 hours before he signs them, we got thru 8%]. The yield on 10 yera notes is currently at 2.63%. They were at 2.95 when I said they were going back to 2.20%. Right now 30 year yields are below 3.93%.