US 5-year credit default swaps rise to highest since 2011

https://www.reuters.com/markets/us/us-5-year-credit-default-swaps-rise-highest-since-2011-2023-04-21/

by almog • 3 years ago

146 88 3 years ago

reuters.com

mupuff1234• 3 years ago

Should I be worried about money currently sitting in money market funds (VUSXX)?

rpvnwnkl• 3 years ago

That might be a good question for chatGPT

episteme• 3 years ago

Why?

DontchaKnowit• 3 years ago

God were only like a few months in and im already so annoyed with people bringing up chat gpt. No this isnt a good question for chat gpt because chatgpt has no critical thinking skills, which is the foundation of a sound investment strategy.

Chat gpt is trained on the internet. The ratio of bad advice to good advice on the internet is about a million to one.

NotYourLawyer• 3 years ago

Nothing I ever say is investing advice or legal advice. It I’m not worried.

lumost3• 3 years ago

Not your finance person, but a good way to think about an abstract event like “US debt default” is through two lenses.

1) it’s an event that can’t happen unless a lot of powerful folks take a bath. Odds are good that energy will be directed to prevent it - or failing the ability to muster energy, you won’t care.

2) If the dollar collapses, what asset would you want to hold? Would it make sense to hold that asset absent a crash?

radicaldreamer• 3 years ago

For (2) - obvious answer here is crypto but again, the crypto market might implode because if (1) actually happens, the US gov is extremely incentivized to make crypto ownership and trading illegal.

artificialLimbs• 3 years ago

Re: 2: Gold and land.

dullcrisp• 3 years ago

Bottle caps, and no not really.

quickthrower2• 3 years ago

Negative dollars, and some foreign asset

ucha• 3 years ago

Relevant Matt Levine: "Why Would Anyone Buy Credit Default Swaps on the U.S.?"

https://archive.is/r0lI2

H8crilA3• 3 years ago

To be honest there were countries that defaulted on their sovereign bonds in their home fully controlled currency. Russia did this in the late 90s and took down LTCM, which was collecting premiums for insuring something that they thought is too illogical to ever occur. Well, it did occur.

The reason why this is illogical is that there is very little distinction between "the dollar" and US sovereign debt. It applies to all countries in a similar situation, for example "the Yen" and Japanese Government Bonds. It doesn't quite apply to odd cases like, IDK, Spanish sovereign debt in EUR and "the Euro" since the Spanish government does not control all forms of the issuance of the currency of the bond.

btilly• 3 years ago

I don't believe that LTCM was insuring anything.

What they were doing is identifying pairs of securities whose values had diverged and they believed would eventually converge. They would short the more expensive one and buy the cheap one. When they converged they would sell the no longer cheap one, use the money to close out the no longer expensive one, and collect a profit.

However usually the reason why one was more expensive is that it had a more liquid market. So people could safely invest in it with money that they might need back quickly. This shouldn't matter if you planned to buy and hold though..at least in theory.

But in the wake of the Russian default, liquidity became more valued. So people sought to get rid of illiquid securities and buy liquid ones. This meant that LTCM had shorted things that were rising in value, and bought things that were falling in value. So they had a loss. And as the shorts got higher, they wound up having to sell assets at a loss to cover their shorts. And now the temporary losses became very real ones, and drove them bankrupt.

However, infamously, their investments made money in the end. They just weren't able to last long enough to benefit from it.

Scoundreller3• 3 years ago

It doesn't quite apply to odd cases like, IDK, Spanish sovereign debt in EUR and "the Euro" since the Spanish government does not control all forms of the issuance of the currency of the bond.

While that's true, Spain could go the tax route and say "gimme more euros this year" or sell off assets it owns. I guess a printer is faster (if they feel like it) but medium-term, developed countries have lots of tools to pay down debts (if they feel like it).

For some reason, people are more comfortable with inflation as a tax than taxes.

whitemary• 3 years ago

To be honest

Thanks for coming clean.

khuey4• 3 years ago

This is an extremely relevant Matt Levine piece. He gives an example of long-dated treasuries trading at 83 cents on the dollar. Today long-dated treasuries issued during COVID are trading well into the 50ies.

H8crilA3• 3 years ago

That's not because of their credit risk but because they pay little to no coupon and get discounted through the interest rates. In particular imagine a treasury bond that will pay $100 in 10 years, you wouldn't pay $100 for that, would you? You'd instead put that $100 in a savings account (t-bills).

The true credit risk on US Treasuries is indeed an abstract and mysterious creature. Nobody knows what would such a "default" mean in practice, what paper would get paid up and what paper would not get paid. Would commercial bank deposits at the Fed get paid? And if not, then what does it even mean to "pay in dollars"? Like how do you achieve "paying someone X dollars", do you deliver printed currency?

heisenbit• 3 years ago

The way I understand the article: Insurance not likely to pay in case of small short cured default and in a major default the counterparty is at risk. So buying it as insurance makes no sense. But..

.. there are special rules which trigger even in a short default allowing a fair bit of money to be made turning the CDS into a sensible bet on a short duration US default.

gtop3• 3 years ago

The debt ceiling functions primarily to give negotiation leverage to the minority party. The problem is, if the threat of not raising the ceiling is executed on then it hurts both parties. Even the possibility that the debt ceiling will not be raised is collectively hurting us. This credit default swap is one signal of the negative impact these debt ceilings negotiations have. We really need a reform on the way the US handles debt, one that provides more predictability.

A no-nonsense solution would be to make raising the debt ceiling part of the annual budget or any bill that that has an impact on the budget. Another potential solution would be to make increases on the debt ceiling automatic based on a percentage of GDP, or over time. Another solution would be to reduce the national debt. We have options, and it almost doesn't matter what we choose because our current path is too volatile.

zrail3• 3 years ago

The most straightforward option would be to just get rid of it. It has not made any sense since the 1970s when Congress gained direct control over the budget. The actual thing that the debt ceiling does is stop the Treasury from issuing debt to pay for things Congress has already decided to pay for. It's bonkers.

Also, it's not just "the minority party". Ever single debt ceiling crisis since 1995 when the Gephart Rule was repealed has been instigated by the Republican Party.

downWidOutaFite2• 3 years ago

Republicans had no problem raising the debt limit 4 times after Trump's tax cuts produced trillion dollar deficits.

bfdm• 3 years ago

Yep. When congress (or any government) passes bills with spending implications, following through with the associated payments should be automatic/mechanical, not relitigation of the issue. To pretend the central bank/treasury is anything but the check writer for government spending is just fiction.

cscurmudgeon4• 3 years ago

The actual thing that the debt ceiling does is stop the Treasury from issuing debt to pay for things Congress has already decided to pay for.

Maybe we should revisit those decisions. Even individuals revisit decisions, it is insane that we don't revisit certain decisions.

Even if we agree to pay for things, is the government at peak efficiency? There is so much wastage at every level in the govt. Rather than blame Republicans, maybe ask why Democrats are against a more efficient govt (that can still be large and fund their pet programs).

https://www.cnbc.com/2023/04/18/heres-how-the-federal-govern...

The U.S. has lost almost $2.4 trillion in simple payment errors over the last two decades.

This is just at the federal level.

neilwilson• 3 years ago

"The actual thing that the debt ceiling does is stop the Treasury from issuing debt to pay for things Congress has already decided to pay for."

It's unlikely it does that. If it came to a court the judge would have to decide which of Congress's instructions take precedence or how to reconcile them. That falls into territory of implied repeal and reinterpretation of the Federal Reserve Act.

If the Democrats had any backbone, they would instruct the Fed to pay what Congress has authorised and if the Fed said 'no', take them to court to force an interpretative judgement to settle the matter. (which I call the 'empty chest' problem).

Which would almost certainly involve reading section 15(1) of the Federal Reserve Act using the same 'futurity' that the courts have used in appropriation bills.

(ie the deposits it talks about are past, present and future deposits).

That would imply a balancing amount held at the Fed, and the debt ceiling stops the Treasury refinancing that balance into bonds.

Both the spending and the debt ceiling requirements of Congress are then satisfied - and the tool is neutered.

_heimdall2• 3 years ago

Even more straightforward option - get rid of the debt ceiling by requiring the federal government to run a balanced budget. States are required to run a balanced sheet (with a few caveats), the feds should have to follow the same rules.

FooBarBizBazz• 3 years ago

The actual thing that the debt ceiling does is stop the Treasury from issuing debt to pay for things Congress has already decided to pay for. It's bonkers.

Great summary. That's why, if there's going to be something like a debt ceiling, it has to be part of the budget process, not a separate part of the debt-repayment process. You don't boycott paying your credit card bill. You stop putting more purchases on it.

Granted, the one step follows the other. But Congress is manifestly unable to backpropagate consequences by one step.

So if we're going to have a guardrail, it has to be in the right place. Yet somehow this middle way is never considered. Instead it's just "debt bad" or "debt ceiling bad". People always with the dumb binaries and false dichotomies.

calgarymicro2• 3 years ago

The debt ceiling functions primarily to give negotiation leverage to the minority party.

Have Democrats ever actually made such a big deal out of this though? It seems like the increases were fairly painless during the Trump years when the Dems controlled the House.[0]

[0]https://www.cbsnews.com/news/whats-in-the-budget-deal-negoti...

timcederman• 3 years ago

No, they haven't. All crises have been caused by Republicans. https://en.wikipedia.org/wiki/United_States_debt_ceiling#Leg...

zuminator• 3 years ago

The reason is that at least officially, the Republican Party is in favor of small government. So if the Democrats as the minority party were to say,"Compromise with us or we won't raise the debt ceiling," the Republican Party's response would be a sarcastic, "Oh no! Don't impose drastic spending cuts! Anything but that!" Thus the Democrats have no leverage to hold back a Republican Administration's spending priorities.

asdfman123• 3 years ago

It sounds like a very even handed way of saying it’s a republican stunt to hold democrats hostage.

I know what I’m writing sounds charged and partisan, but is it wrong?

Analemma_• 3 years ago

Better yet is just getting rid of it. It's unconstitutional ("full faith and credit shall not be questioned"), if the Treasury decided to ignore it nobody would have standing to sue anyway, and it's just redundant: Congress already has the power of the purse, if they want to cut spending, they can propose a budget which does this. The debt ceiling is nothing but Congress shirking its responsibility.

cscurmudgeon4• 3 years ago

"full faith and credit shall not be questioned"

How does that apply to the debt ceiling?

lamontcg• 3 years ago

The debt ceiling functions primarily to give negotiation leverage to the m̶i̶n̶o̶r̶i̶t̶y̶ Republican party.

Fixed that.

And the Republicans only caring about it when they're in power should give you some indication of the level of commitment they have to smaller government.

Scubabear68• 3 years ago

The theory and the practice of CDS’ have always been wildly different.

In theory, a CDS is “insurance” if a bond issuer defaults.

In reality, CDS’ are used to go in and out of positions on companies because contracts are too difficult and expensive to cancel. The end result is big firms end up with huge, complicated CDS positions all over the place for 5-10 years until the contracts cancel.

A CDS on the United States is another stupid end result just like CDO2 vehicles were.

The CDS market is just so incredibly flawed when markets are stressed.

US 5-year credit default swaps rise to highest since 2011

Related Stories