Posted on 12/01/2008 7:06:24 AM PST by TigerLikesRooster
US Treasury 10-yr CDS hits record high
Mon, Dec 1 2008, 11:34 GMT
http://www.afxnews.com
LONDON, Dec 1 (Reuters) - The spread or risk premium on 10-year U.S. Treasury credit default swaps hit a record high on Monday, extending a recent trend as market participants continued to fret about the scale of the government's financial rescue programmes.
Ten-year U.S. Treasury CDS widened to 68.4 basis points from Friday's close of 60 basis points, according to credit data company CMA DataVision.
Five-year Treasury CDS widened to 52.5 basis points from 46 basis points at Friday's close, it said.
(Reporting by Emelia Sithole-Matarise)
(Excerpt) Read more at fxstreet.com ...
Hard to say. It should mean that rates will go up for T-bills as they have more risk. (Which in turn would drive other rates up.) But, and it’s a big but, everything else is perceived to have way MORE risk.
It’s too early to say how things will by in 9 months. We are living through unprecidented times. Hopefully by then things will have calmed down a bit and you’ll have a reasonable environment to invest in. Be glad they are not rolling over today.
Personally, I’m still betting on inflation. The amount of money that the Fed has created is staggering. Given that, if I were in your position I would look at inflation adjusted bonds, like TIPS.
But again, it’s too early to say. The current deflationary trends could accelerate (I could be wrong. It happened once in 1983.) That would probably make a regular fixed rate CD like you have the better choice.
read for later
“When you factor in inflation...We’re entered deflation...”
This seems contradictory to me. First you’re factoring in inflation, but then you say we’ve entered deflation. I didn’t think it was possible to have both simultaneously. By the way, I’m not trying to be critical, I’m easily confused regarding financial matters, and just looking for an explanation.
Right. But I was talking about tax frees...many of which are attrtacetively priced right now compared to T-Notes or other taxable fixed income vehicles(that aren’t junk).
For example, a muni paying 3.75% annually is the taxable equivalent of yield of 5.77% in a combined federal and state bracket of 35%.
That’s very nice!
“The article is “just” pointing out that the cost to insure Treasury debt is rising, which is mentally dissonant in and of itself, because you’re not supposed to have to insure Tsy debt, are you? It’s guaranteed by the world’s biggest guarantor”
With CDS, it isnt about the government side. It’s about the default risk of the people buying the government debt. The amount they have to both pay and obligate themselves to pay if things go bad has risen dramatically for people playing in government debt markets.
The thing is, the ultimate reason CDS $$$ is going through the roof is the increased threat of US government insolvency. If the creditor is holding worthless US treasury notes, he’s sunk too. So it’s getting harder and harder to find anyone to be counterparty to a credit swap. So the $$ amount the counterparties to people buying US treasury debt charge is rising. So the CDS is going up up up.
You make a good point, thanks. Who decides whether and when they should go into the business of insuring government debt? [rhetorical question]
Here is another one of those quandaries produced by the gross distortions within our credit system: There really shouldn’t be any profit available for those selling government CDS insurance because there shouldn’t be any default risk.
And yet **IF** there is default risk, then the payouts would ultimately become a reasonably sized subset of government obligations themselves; a number many orders of magnitude larger than anyone can possibly support.
Keep printing that money, Ben.
“This seems contradictory to me. First you’re factoring in inflation, but then you say we’ve entered deflation. I didn’t think it was possible to have both simultaneously”
We’re entered deflation because the value of assets were inflated by a credit bubble.
Governments are fighting this by going on a printing binge.
So what we’re going to get is these weird gyrations where the currency has little mini-collapses, and prices rocket, then the amount of asset deflation has been ‘taken out of’ the greenback so the buck stabilizes, prices stabilize and go back into deflation, then ... repeat.
By the time you get your money out of a treasury note, it’s going to be worth much less than it was when you put it in.
Hey Paulson, watch your back!
I’ll try a plain English. Apologies if I either make mistakes or cover ground you already know.
The gov’t doesn’t hold the CDS. A Credit Default Swap (CDS) is essentially an insurance policy against a bond defaulting.
The gov’t wouldn’t buy or sell the CDS, but the bond holder and a counter party would. Think of the counter party as the insurance company. If someone is holding 10-year treasuries (or any other kind of debt), they can buy CDS to protect against a default.
Where it can get interesting is you don’t need to own the bonds to buy and sell CDS. Even if neither one of us owned a bond, we could enter into a CDS agreement. It would be similar to betting on a football game, but we’d be betting on some security being good or failing. There is no regulated market for these things and total value of the CDS market is huge. When you hear someone on the financial news talking about ‘counter party risk’ they’re talking about either the potential liability to whoever wrote the insurance or the potential inability of them to pay up if the bonds they insured default.
This article is saying the CDS premium on 10-year treasuries has set a new record. These rates indicate there’s still a very low perceived risk of default, but the market sees a higher default risk than it did before.
Conventional wisdom is that treasuries don’t have a default risk because the US Gov’t can either tax the citizens to oblivion or print money to repay the debt. The CDS market is telling us that some in the market believe there is a small but increasing risk of Plan C - default.
Yea - that’s what we need to ‘splain to people - the CDS spread.
The CDS (default swap) spread on US government debt is usually VERY low — in the single digit basis points range. Now is it over 60. Someone is collecting premiums by writing a default swap, charging 0.6%+ that the US government will DEFAULT on sovereign debt.
And someone is BUYING that swap.
Now, this brings to mind a question: let’s say that someone can collect on the CDS written on a US T. In what currency does the CDS pay?
Easy.
You get all your principle back.
Right now, “return OF capital” is what people want.
“Return ON capital” ain’t something anyone is worried about.
The seeming contradiction in that statement dissolves when you consider the shorthand terminology being used. "When you factor in inflation..." is the insider's shorthand for "When you factor in the inflation rate..."
The inflation rate is usually positive but can be negative. A negative inflation rate is deflation.
Ok,
So if I’m closing on a house in early January, how long do i continue to float??? I can get 5 1/4 right now....Is 5.00 in my future???
.
THANKS all for your thoughts and advice!
A quarter of a point on your mortgage rate is not a life changer. Sounds terrific at 5.25%. Historically, this is very good.
I presume, btw, this is a conventional mortgage you are talking about?
Correct....But I’m a cheap SOB, so every $15 / 1/8 point helps! :0)
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Better I hold onto it than throw it away.....
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I’m tickled that we’re down this far as less than 30 days ago, 6% was the norm...and it hit 6 3/8% within 45 days ago or so, so I can hang with 5.25, but just wondered if I could get “greedy” for another quarter point...
Why would someone buy a cds n a US Treasury?
I mean, if the US Treasury defaults, that pretty much means the whole system is shot, and dollars would be virtually worthless, no?
The Markets already done that. At this writing, the 10-year Treasury is carrying a 2.82% yield. That’s Limbo Low.
Good luck on the rate, you’re likely to get a good one, but don’t wait too long.
A year from now, you’re going to look like a genius! :)
;^)
Keep in mind that (most) money-mkt funds are not insured by FDIC, SDLIC, or any other goobermint organisation, so exercise some care in your choice. No matter how painful it is, READ the bloody prospectus of the mm you're considering, or have a pro translate it for you, esp. regarding what can go wrong. Some mm's are in big trouble right now.
My choice? Buy September or December 2012 Eurodollars and sell December 2009 or March 2010 against them...but, then, I don't mind a bit (a very tiny bit) of risk.
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