moneymorning.com
> In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world
So what? Most trades move the market, even in super-liquid ones. You hit the bid or offer in "market" size, the bid-offer will prob move a tick or two.
> The value of the trade was about $850 million dollars.
No it's not. A futures trade is "on-market", that is it has ZERO value. If yields don't move, his P&L will be zero. What he's done is take the equivalent risk of shorting $850m 10y.
> In simple terms, if that was a direct bond buy, no one would be talking about it.
Yes exactly. And taking the same position in futures is no different. The risk profile is almost exactly the same. 1bn 10y is large-ish, but by no means uncommon.
> However, with the use of futures, you have to have margin capacity behind the trade.
Yes, and so what? I don't know what the margin requirements are for 10y futures, probably about 1% of notional, ie $8.5m . Ie the guy has taken a $850m exposure for an initial outlay of 8.5. That is a heck of a lot easier on the bank account than buying them outright. (Edit: of course he's not buying them, he's selling them. But to sell (short) the physical bonds he'd have to borrow them in the repo market, where you loan cash and take the bond as collateral. Either way you need $850m in cash)
> That means with a single push of a button someone was willing to commit more than $1 billion of real capital
No they weren't. His initial outlay is the margin. That is it. Given there is an upper limit on a bond price (the 0% yield price) his possible losses are capped at something way, way, way less than a $1bn. Let's say the 0% yield price is $105 per 100 notional (i've no idea if this is right, but is approximate enough for this example), then his possible losses are capped at ~5% of notional.
> You only do this if you see an edge
Huh, what? This trade could be for any number of reasons. It could be closing out an existing position, hedging a long physical position (thus taking a position on the spread) or yes maybe an outright punt. But it's hardly earth-shattering. Any mid-sized bank could do a trade like this, and often do.
Edit: re-reading I've just noticed that the article implies this trade could pay-off 10-1 netting the guy 10bn. This is so wrong as to be laughable. The most this guy could make is $850m, and only if the price of treasuries goes to zero! Completely impossible. If the US loses it's AAA rating prices will prob move a dollar or two, e.g go from $98 -> $96 for example, ie he'll make a couple of % of notional.
In short, total nonsense.
(Bearing in mind the other purposes which could exist for the trade - ala hedging, etc.)
You only do this if you see an edge.
But that just doesn't make sense - because most foreign central banks that have the wherewithall to do that own a TON of Treasuries, so they are just making things worse for themselves....don't see how that makes sense.
But I could be missing something here.
I'm still confident a deal will be done, and won't jump into the politics here, but I think enough damage has been done to spook "the markets" now and in the future (if, for example, we get to have this discussion again in 6 months) for some light bargain hunting.
$1 billion bet that the US blows up. $20 billion bet that $1 billion bet that the US blows up itself blows up, well, anything really. Pick five thousand things if necessary which go up, or down, or sideways if market sentiment shifts from "The US cannot possibly default" to "The US will almost certainly not default."
A few weeks later you sell your "US blows up" tickets for 80% of what you paid for them - or 8% of what you paid for them - and drown your sorrows at calling the implosion of the US incorrectly while counting your speculative gains on your own private island.
I think the word for this is "speculative attack."
http://en.wikipedia.org/wiki/Credit_rating#Sovereign_credit_...
List of sovereign credit ratings sorted by country:
http://en.wikipedia.org/wiki/List_of_countries_by_credit_rat...
A chart comparing USA's credit rating to other nation's credit ratings. Yay charts. I'd be more interested in the algorithm used to calculate the rating than the rating itself.
TLDL: There's no algorithm. There's no one ratio you can look at. Analysts travel to the country, assess how likely it is to pay its debt, and report back. A few people listen to the evidence then take a vote on the new rating.
Derating may be a black eye to the US's status in the world economy, it's hardly the end of anyone investing in Treasury Bills.
[EDIT] That's from the podcast itself. I listened to the whole thing. Downvote the parent if you disagree.
According to S&P
Spain has AA
Italy has A+
many others have A.
is this really a credit rating, or more about how much faith citizens have in their own country. with all due respect, i find it difficult to believe that the US could have a AAA rating. of course, the earning potential of the US is huge, but its current standing with regards to debt is not so good.
or maybe i dont quite understand how the ratings work?
So, for instance, say you are a big bank that wants to borrow cash overnight at a low-interest rate - you have to put something up as collateral. Various central banks have various instruments for various things, but for the most part they tend to require 'investment grade' securities - which is why Greece has been causing such a kurfuffle because if they have a 'selective default', then the ratings agencies will downgrade to junk status and financial institutions won't be able to use Greek gov't bonds as collateral anymore.
That's an overly simplified case, but that can be extended to any where that requires collateral. Most, if not all, financial institutions swear by those credit ratings.
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/...
The US is one of the largest economies in the world; its overall tax revenues are low compared with other developed countries; as someone else pointed out, it controls its own money supply; it has enjoyed low inflation for the past thirty years; Americans grumble about our taxes but unlike Argentines and Greeks, we generally pay what we owe.
I think alot of people really underestimate the size of the US economy.
Also, it could be relatively minor..say downgrade to AA from AAA pending how the rest plays out in 6 to 8 months.
Personally I think this is a mistake. Wasn't the financial meltdown caused by the general lack of transparancy?