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 ...
I would like to say something today about the gold bugs who appear on this BBS whnever gold is up a dollar. But they already know.
Fixed-rate on a mortgage is the way to go, if one intends to own the house for more than a year or two.
Ahhh...Thank you very much! So it sounds like there is a little less trust in the government’s financial health now.
What does that mean for bonds like I or E series? If the government is in bad shape in the future, might people not be able to redeem them for their full value?
Thanks! Both of our MMAs are insured, but I’ll double check. I don’t know much about buying foreign currencies—maybe I’ll look into it.
The point is that, until quite recently, a whole lot of the ''financial types'' thought that economies, the US economy in particular, would (haha) 'normalise' fairly quickly. Thus, 3-4 years out, the Eurodollar futures mkt held the view that, in 3-4 years' time, US interest rates would be back at 4% or so for 90-day paper.
Recent developments have clearly changed this view, so what's happening is that the far-out Eurodollar contracts are gaining sharply on the closer-in ones, because they were at a discount to the closer-in (they still are, but the discount is shrinking quickly, and rates to keep doing so for some months). Still at a 140-bp discount or so, so it's still a worthwhile trade; target is about 80 basis pts (bp's), I should think.
Good luck to you, and FReegards!
I don’t know what it would mean for I or E series bonds.
Remember, the CDS is protection against the US Gov’t defaulting on a specific bond issue and that is still an unlikely event. If it were to happen, it doesn’t necessarily mean the gov’t would default on other bond issues. An analogy would be an individual who defaults on their car loan, but stays current with their mortgage.
Okay, thanks for explaining that!
Thank you! That makes sense.
When you see these numbers - what exactly is it that makes it "unbelievable"?
Yeah, but they're safe.
Getting a small percentage in that fund is a heck of a lot better than losing 36-42% in the others. I moved all of mine into that fund last November and have been earning 4% through all of this.
Thanks....I should have been a little more precise with my wording. I’m have to lock in a FIXED rate mortgage in the next 3 weeks, but I’m just wondering if 5.00 is gonna happen in the next few trading days....
“When you see these numbers - what exactly is it that makes it “unbelievable”?”
It’s unbelievable on so many levels...I’ll try to list them from banal to semi-sophisticated, and I’ll probably leave much out, but it is brain-bending.
Implication #1 is that folks would be willing to lend the government money for TEN YEARS and receive a ROI of [now] 2.72%. A cruddy ROI by any measure, but truly astounding when you consider that the Tsy and Fed have increased the monetary base by nearly a factor of FOUR in the last 45 days; implying massive, massive printing of money, (and there has NOT been “printing” up until this period...NOW THERE IS) such printing as has always preceded periods of near runaway inflation, making that 2.72% yield absurd. FOr all the money the govt is printing, the interest rate should be 7, 8, 9%. Of course, that would just hasten an economic collapse/depression.
Implication #2, that rate being an all-time low, not just a 50-year low, means that inflation expectations are utterly minimal for the next period, again, completely counterintuitive.
But the downside of implication #2 is that the bond market must thus be anticipating DE_flation, a very uncomfortable, pernicious, and financially destructive condition that essentially NOBODY (OK, very very few, and those who were “alive” in the GD were typically not investors; they were kids or teenagers) now alive have lived through, except in Japan.
Implication #3: Folks are so bloody scared of literally anything that they are running to this guaranteed debt and bidding up the price of said debt so much that the apparent yield is being so grossly depressed. They are not buying stocks with PEs of 3, 4, 5. There is no appetite for risk. At all, none. They are mimicing the behavior of the banks; literally just hoarding their money, hunkering down, and doing nothing. Nobody wants to invest in anything, which means “nobody” is going to be able to pay their [business] debts.
Implication #4: DE_flation, implying that asset prices (such as stocks, real estate) will continue to fall in price, because the money used to buy them is considered more valuable in cash cash liquid form than the potential upside of the asset(s)....being much of the collateral underlying the lending that is already so distressed...said collateral is NOT being supported by the infusion of these mega-gargantuan amounts of liquidity....meaning that the Tsy & Fed, having literally thrown everything they can at this thing and having literally abandoned any form of restraint on whom they will bail out and for any amount....is basically completely out of control of this situation.
So it kind of goes on and on, and the hope is that it deosn’t represent the death spiral of our financial system. It isn’t just the market taking a dump. It isn’t just a bunch of people losing their jobs and stores going BK. The challenege to me is to not become alarmist, but these are crazy numbers.
Couldn't it just be 'supply and demand'?
All of a sudden a huge number of people- more particularly foreign institutions operating under new, safer, rules- want CDSs for their treasury bonds and those that offer them can get a higher rate.
Explosive demand, rather than any consideration of risk, may be operating here.
There could be some market distortion as investors look to protect bonds and counter parties are hesitant to write contracts even where the actual risk is nil. Kind of a chicken and egg whether risk perception is driving supply/demand or supply/demand is driving risk perception.
I fear we'll have deflation until the Chinese et al figure out our treasuries are based on AIG, CITI, and WAMU junk. Stuff they never would have invested in - at that point we have to raise our interest rates to keep them - and that's where inflation comes in.
A scenario that would allow for all these contradictions to make sense is for a new IMF type world currency - one that let's everyone to "start over". Do you think that's possible?
My thinking on this issue is not settled. There are essentially three possible branches.
One would be, and I have to believe this is the most likely, is that we muddle and slog our way through with the apparently infinite fiat resources of our current system working their hardest to keep the status quo as quo as it can. No dislocation. I’m fairly convinced that we’re essentially in a devil’s bargain with the Chinese. They need us as an export market to keep their population employed and out of rebellion. We need them to keep buying our debt and to keep supplying cheap consumer goods so as to keep apparent inflation under control. That is not to say that someday, this arrangement could not break down and lead to a true breakdown/dislocation. (which is my second possible path)
“I fear we’ll have deflation until the Chinese et al figure out our treasuries are based on AIG, CITI, and WAMU junk. Stuff they never would have invested in - at that point we have to raise our interest rates to keep them - and that’s where inflation comes in.”
IMO the defect with this line of thinking is it assumes the Chinese do not know EXACTLY what they are doing. They know what their side of the bargain is as well or better then “we” do, IMO. We WILL have deflation as far as I’m concerned. It’s unavoidable. IMO, 2009 will (for the avg American) be just about the crappiest year any have lived through in quite a while. Talking about the real world economy, not just the stock market.
The other path is a massive currency and market dislocation, with 2 sub-directions possible. One is a massive devaluation of the USD, which will feel like HUGE inflation at home. I consider this less (least) likely. But if it really gets going, down this road is the tinfoil zone, new Amero currency, gross socialism.
The other path is a gross credit-induced deflation, where business literally shuts down. Actual hard cash dollars seem to be MORE valuable, despite all the printing we KNOW is going on. This is somewhat what’s going on now. Credit is just stupid-tight, and one of the biggest drivers of this is the Fed paying interest on bank reserves, which is beyond moronic. This encourages the banks to hoard. Without lending, the banks aren’t going to be making any profits going forward, and if that’s the case, their stock values are going to suck. Hence, much of the rest of the market will suck. But these are the geniuses we have running the show.
Got wobbly yesterday and locked at 5 1/8%....Market will probably tank today.. :0)
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.