Tuesday, July 15, 2008

Update on USA CDS

I've gotten many e-mails about CDS on the United States. I was able to find a Bloomberg ticker for the figure most often quoted (the 10-year): CT786916. Use the Currency key to bring it up. Not much history but you can at least follow it from here on in.

Anyway, heard the spread widened 2bps today to 22bps. That's not on Bloomberg yet.

This morning showed some real panic trading, with broker CDS 30bps wider across the board (not just Lehman this time!) But are now mostly unchanged. CNBC is lapping up this "change" in short-selling rules, but I think its just a wildly oversold market in both stocks and credit, especially in CDS, which have been leading the charge.

Now don't go accusing me of calling a Bottom (tm) here, but I do think there is a strong possibility of a relief rally after bank earnings. I'm staying short in duration.


PNL4LYFE said...

Last US CDS run I saw today was 20-23. Interestingly, the spread between US and Germany has gone from 0 to 10 in the last 2 months.

Accrued Interest said...

The only way going long USA CDS makes sense is as part of a chaos trade. Don't you think? Its probably the cheapest choas hedge going. I mean if the USA is defaulting, isn't Germany in pretty big trouble?

PNL4LYFE said...

I think you would only buy it as a very low cost way to make some money if general credit widens. I think the issue has been raised in the comments here before, but what counterparty would survive an event that causes the US to default? Realistically, I think you'd be hoping to unwind it at 50bp after a few years of budget deficits, bank bailouts, and other costly news. I think a better play might be the lower quality Eurozone countries like Portugal, Italy, Greece, and Spain (the PIGS...). You could see massive widening there if the Euro currency breaks up.

cap vandal said...

I posed something similar to pnl4lyfe regarding counter party credit, although I just referred to it as the joint probability of a US default and the survival of anyone. It is like war gaming nuclear exchanges.

I suppose I could see the idea of it widening and proving profitable. Nevertheless, I really don't see the point in them, who would buy them, who would sell them, and why.

It seems like modern finance run amok.

I don't care what hedge funds do among themselves (or to themselves) but don't like the idea of CDS's mucking up the real economy more then they already have. I suppose the connection is the 'broker dealers' who are tied into the real economy.

Accrued Interest said...

Cap: You are completely right. I'll tell you, the more people I talk to, the more I hear about these chaos trades abounding. That is, people who in some way have a positions designed to produce big returns if all hell breaks loose.

USA CDS makes sense for this kind of trade.

I for one don't like making trades that I wouldn't consider owning to their logical conclusion. For example, I'd never buy a bond that I wouldn't, at least in theory, hold to maturity. So I wouldn't buy USA CDS if I don't think it would actually work as a hedge against default.

PNL4LYFE said...

I read a research piece recently that cited a bizarre accounting rule which allows European banks to sell protection on sovereign (i.e. "risk free") credits and make no balance sheet entry whatsoever. They would just report the coupons as revenue. Sounds like a pretty sweet deal to me! Also, I think synethetic CDOs were big sellers of low spread CDS until the the mess began last summer.

GS751 said...

Look at the CDS spreads on AIG, which I have held a short position in for awhile :). Why Buy treasuries, if you measured inflation right now like you measured it in the 70's it would be 11 - 12%. Thats a massive negative real yield.