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Friday, February 20, 2009
The CDS Armageddon Count Up - US Risk Passes 100 Bps
US CDS mid passes 100 basis points (full market 95/105)... obviously historic event. Some traders call this the doomsday count up as the higher it goes the dumber you have to be to buy it (as you will never collect on any insurance), and the likelier it is that the end of the world is nigh. If this had to be quanitified in terms of colors, the equivalent would be a deep shade of burgundy.
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7 comments:
dumb question: something particular to the way US sovereign CDS is written or you just saying if the US ever actually defaulted we'd all be blown to bits...?
somebody has to pay you in case of default. as us will be done, nobody would be able to fulfil the other side's obligation
not sure i understand. If two european hfs are facing each other on a USA contract, and there was a event of default on US sovereign debt why wouldn't the cds pay out? (i.e. hf a pays to hf b)
all cds trades occur via broker intermediate. if us is dunzo no trades will be executed
It's early. There's time to transfer these contracts to a place or exchange where they can indeed live on, and one party can at least attempt to force payment. These contracts strike me, right now, as an option on the possibility that a clearer path to payout is eventually established.
I don't understand this move, although I admit to not knowing the nuances of the contract. But, you have Helicopter Ben at the Fed, combined with the fact that Sovereign currency issuers have no default risk if they don't want it.
Id est by being a currency issuer they have traded default risk for inflation risk. The US will never default they will just inflate. See Campbell.
For a default to even be possible you need a depression AND extreme inflation - two things that don't normally go together.
Inflation is a prerequisite for government default (in government's own fiat currency), because otherwise printing money is a painless option, especially if you give it a respectable name like "quantitative easing".
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