CDSs on US Treasuries

Interesting post. Theoretically 0, I believe in reality 0 as well for the time being.
 
Black Swan Wrote:
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> Interesting post. Theoretically 0, I believe in
> reality 0 as well for the time being.
nope. i see the 5yr quoted ~ 35bps. was 5bp about a year ago.
 
Of course it’s not theoretically 0. In reality it should be 0, but it’s not. Note that it should be 0 not because the US Gov’t can’t default, but that no trading counterparty would exist to pay if you off in the event of default. However, the instruments exists to play the relative changes in treasury pricing.
 
I’ve suggested to my boss that this would be the ultimate hedge on your equity portfolio as equity will only take a huge loss should there be doubt in the system as a whole.
 
MattLikesAnalysis Wrote:
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> Me. If they’ve gone up 25x in one year.
the spread has widen but you would not have made that much. maybe 1% (without modelling) if you bought these.
 
NakedPuts Wrote:
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> Of course it’s not theoretically 0. In reality it
> should be 0, but it’s not. Note that it should be
> 0 not because the US Gov’t can’t default, but that
> no trading counterparty would exist to pay if you
> off in the event of default. However, the
> instruments exists to play the relative changes in
> treasury pricing.
i agree.
i wish i could put up 0 collateral, and sell $50MM and pocket $200K per year for 5 years… if UST defaults, i do too.
 
Well thats what I meant.. the spread increased 25x…
hmmm.. I wonder if we could lever ourselves up huge on these so that you can capture that 25x.. buy and sell options on these…
 
Who would pay for these to cover their Treasury debt if it doesn’t actually protect from default? I mean, people have to be buying these for the spread to widen…
 
MattLikesAnalysis Wrote:
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> Who would pay for these to cover their Treasury
> debt if it doesn’t actually protect from default?
> I mean, people have to be buying these for the
> spread to widen…
why not just sell 5 year UST futures? you can leverage there.
 
If Rome can fall so can the US and the economic/political world didn’t disappear from Rome’s “default”.
It is the global marketplace and there could still be wealth in a bankrupt country should the rules of private property remain in place and the monetary system is not completely inflated to the point where default is prevented but currency is destroyed.
 
If the government defaults, I think that we have many more problems to worry about. The money you would make on the default swap would probably be nearly worthless anyway.
 
JustPass Wrote:
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> Who would buy these?
Someone who thinks that the counterparty will pay up when the US Government can’t. I guess the counterparty must be North Korea, who makes the world’s best $100 bills.
I hadn’t thought about buying to capture spread changes. That seems quite risky to me because underlying default is probably highly correlated to conterparty default.
 
ConvertArb Wrote:
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> MattLikesAnalysis Wrote:
> ————————————————–
> —–
> > Me. If they’ve gone up 25x in one year.
>
>
> the spread has widen but you would not have made
> that much. maybe 1% (without modelling) if you
> bought these.
Would you really only get a 1% return should the spread move up by 25x? Whats the calculation here?
 
bchadwick Wrote:
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> JustPass Wrote:
> ————————————————–
> —–
> > Who would buy these?
>
> Someone who thinks that the counterparty will pay
> up when the US Government can’t. I guess the
> counterparty must be North Korea, who makes the
> world’s best $100 bills.
>
>
> I hadn’t thought about buying to capture spread
> changes. That seems quite risky to me because
> underlying default is probably highly correlated
> to conterparty default.
Maybe the bet isn’t about waiting until default, but waiting until the market prices most of the default in… Is it possible to have a public sector default and a running private sector? hehe. government bailout by corporations… mmm, facsism.
You could buy a CDS on your counterparty as well..?
 
MattLikesAnalysis Wrote:
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> Where can I find pricing for these?
Try CMA, a subsidiary of CME Group, which has a product called Quote Vision - it’s a price discovery service that takes all the thousands of emails a trader receives and creates a dashboard of prices. Not sure if they cover US Treasuries, but based on how their technology works, I don’t see why not.
Quote Vision - buy side
Data Vision - risk management/research
 
MattLikesAnalysis Wrote:
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> ConvertArb Wrote:
> ————————————————–
> —–
> > MattLikesAnalysis Wrote:
> >
> ————————————————–
>
> > —–
> > > Me. If they’ve gone up 25x in one year.
> >
> >
> > the spread has widen but you would not have
> made
> > that much. maybe 1% (without modelling) if you
> > bought these.
>
> Would you really only get a 1% return should the
> spread move up by 25x? Whats the calculation here?
you have to make some kind of assumptions here. let’s assume 40% recovery. I will model these out from 5 to 35bps.
At 5bps, an equlivent bond priced off the swap curve would be 99.76 using JP Morgan Model.
At 35bps, an equlivent bond priced off the swap curve would be 98.35
move of about 1.5 pts.
 
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