US Treasuries 40x riskier than last year?

[Aeson]

http://bloomberg.com/apps/news?pid=20601170&refer=home&sid=a2VdrjC1TWxE

World According to TARP No Laughing Matter for U.S. (Update2)

By Abigail Moses and Shannon D. Harrington

Oct. 29 (Bloomberg) -- The financial crisis exacerbated by credit derivatives is costing so much to fix that speculators are now using those same instruments to bet on governments as the price tag for bailing out banks approaches $3 trillion.

The cost to hedge against losses on $10 million of Treasuries is about $40,000 annually for 10 years, up from $1,000 in the first half of 2007, based on CMA Datavision prices. The equivalent for German bunds has risen to more than $36,000 from $2,000, while it has jumped to $64,000 from $3,000 for U.K. gilts.

This CDS stuff is kinda getting scary. I wonder how pervasive this is? We've already seen Iceland essentially default... and what happens when a relatively small loss (on the cataclysm scale; a trillion or 3 in MBS) poses systemic risk due to excess leverage and counterparty risk (CDS)... What happens when there's a much larger default with that type of derivatives structure built on top of it? Say, a medium-large sized nation (economically) "jingle mails" itself in a revolution?

Also of note... gilts > bunds > bonds on the naming markets

[KrazyHorse]

Yet at the same time the yield on Treasuries is ridiculously low...

[Kidlicious]

Originally posted by KrazyHorse
Yet at the same time the yield on Treasuries is ridiculously low...

It's 40x riskier but still the safest investment.

[Aeson]

Originally posted by KrazyHorse
Yet at the same time the yield on Treasuries is ridiculously low...

The yield being low says more about the relative risk of the alternatives though, right?

[snoopy369]

Somehow I think this says more about the risks of CDS than of Treasuries...

[Aeson]

If only they had a CDSDS?

(OMG... lets go into business!!!!)

[KrazyHorse]

a) The price of CDS on US Treasuries has increased more than the price of CDS on many other national gov'ts debts
b) The yield relative to default probability also says something about the absolute risk aversion of investors

[KrazyHorse]

Originally posted by snoopy369
Somehow I think this says more about the risks of CDS than of Treasuries...

If the price of a CDS goes up it is because the risk to the issuing party has increased. This risk comes in two forms: the risk that the underlying will go into default and the counterparty risk that you won't be paid your spread. Since the spread is generally payable in advance, this risk is minimal compared to the counterparty risk on the other side (where in the case of an underlying default your counterparty risk is on the whole notional amount). One would think that an increased expectation of counterparty risk on CDS would DECREASE their price, given a constant risk of default on the underlying.

[Aeson]

So you're saying investors in treasuries are driving up the price of CDS because of demand (price) for risk adversion (CDS), rather than issuers being wary of offering CDS due to increased risk?

I'd buy that. (The treasuries too, but not the CDS since if the US Gov defaults it all goes to hell anyways right?)

[edit]... crosspost, but still gonna leave it. Not quite sure what you're saying is the cause of the CDS increase KH.[/edit]

[KrazyHorse]

Originally posted by Aeson
If only they had a CDSDS?

(OMG... lets go into business!!!!)

They do, basically. Just buy a CDS on the debt of your counterparty.

[KrazyHorse]

Originally posted by Aeson
So you're saying investors in treasuries are driving up the price of CDS because of demand (price) for risk adversion (CDS), rather than issuers being wary of offering CDS due to increased risk?

That's not what he said. He said "the risks of CDS", which lies in counterparty risk. As I demonstrated in the post above an increase in counterparty risk in the CDS market would, ceteris parebus, drive CDS prices down.

[Kidlicious]

Isn't the risk increased because they are in higher demand?

[KrazyHorse]

Note that I do agree with the statement that increased risk aversion accounts for some of the increase in the price of CDS.

[Aeson]

That's no fun. It needs a new name and structure (ideally hidden among thousands of pages of documentation) to be sufficiently obtuse for my ends....

[KrazyHorse]

Originally posted by Kidicious
Isn't the risk increased because they are in higher demand?

What risk?