Investing to avoid inflation and instability

Ark_Welder

http://www.bloomberg.com/news/2011-07-28/u-s-credit-swap-trading-surges-80-as-debt-ceiling-deadline-gets-closer.html

gadgetmind

Thanks for that, Ark Welder. It's a big game of musical chairs; when the music stops will you be left holding a worthless asset?

I've never been big on borrowing (understatement!) and I'm now *very* cautious lender.

Ark_Welder

gadgetmind wrote: »

Thanks for that, Ark Welder. It's a big game of musical chairs; when the music stops will you be left holding a worthless asset?

I've never been big on borrowing (understatement!) and I'm now *very* cautious lender.

But the asset will not be worthless. Default does not mean that. The coupon might be missed, the CDS might be triggered. Whoever 'ends up' with the asset will have something where the coupon payments are resumed and the missed ones are paid. And, the asset is fully paid upon redemption.

The road might have some pot-holes, but at the destination, there is tea and biscuits.

Yesterday's 4-week US Treasury bond was 4x oversubscribed. Who would buy that if they thought they would not be paid in full in August?

Ark_Welder

From the International Swaps and Derivatives Association web-site:


Q) Are CDS triggered by a declaration by a rating agency that the Reference Entity has been downgraded or is in “default”?

A) No. There is no link between a rating agency declaration and a CDS Credit Event. It is possible that the same set of facts might give rise to both, but it is also possible that one might occur but not the other.


Q) Would a Credit Event on the US lead to massive payments by protection sellers?

A) No. According to the Depository Trust & Clearing Corporation’s CDS data warehouse, the total net exposure of market participants who have sold CDS credit protection on US sovereign debt is approximately $4.8bn as of July 15, 2011. This figure is calculated by summing the net exposures of the protection sellers, and so it is impossible for any one firm selling protection to have more than $4.8bn in exposure and, of course, given that there are many net sellers, any one seller’s exposure is likely to be far less.


There are others there too, including where to get data regarding CDS exposures.