US Treasuries 40x riskier than last year?

[Aeson]

Originally posted by KrazyHorse
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.

I was asking you based on your A,B post. Sorry if that edit was confusing. Just meant you somewhat answered the question with the second post that slipped in there before mine, but I wasn't clear on what you were getting at still.

[Kuciwalker]

I don't understand why you would hedge against an investment taken as risk-free by definition.

[Kidlicious]

Originally posted by KrazyHorse


What risk?

I view these as a type of insurance. Investors in US Treasuries are insuring their investment. Insurance doesn't pay in a catastrophic event though. If everyone is insuring their investments and the govt defaults these derivatives are worthless, no?

[Aeson]

Originally posted by Kuciwalker
I don't understand why you would hedge against an investment taken as risk-free by definition.

I agree. Just doesn't make sense to buy CDS on US Treasuries. Do they really expect if the whole system goes under that there will still be payouts from the CDS issuers?

[KrazyHorse]

Originally posted by Kuciwalker
taken as risk-free by definition.

???

[KrazyHorse]

Originally posted by Kidicious


I view these as a type of insurance. Investors in US Treasuries are insuring their investment. Insurance doesn't pay in a catastrophic event though. If everyone is insuring their investments and the govt defaults these derivatives are worthless, no?

There is a good likelihood that a number of these CDS would not actually pay out in case of US Treasury default. Again, this would tend to drive the price of CDS down. The fact that they're still increasing means that people view the likelihood of US gov't default as higher than you would otherwise infer from the numbers.

[Kuciwalker]

Originally posted by KrazyHorse
???

I thought that was the underlying assumption of any financial analysis involving Treasuries. If the US govt defaults then everyone else is so royally ****ed you can't expect anything to hold.

I have the same deal as you and Aeson with these hedges.

[KrazyHorse]

Originally posted by Aeson


I was asking you based on your A,B post. Sorry if that edit was confusing. Just meant you somewhat answered the question with the second post that slipped in there before mine, but I wasn't clear on what you were getting at still.

My point is that Treasury yields are both a function of the relative risk of treasuries to everything else as well as overall risk aversion. If you're really risk averse you pull your money out completely and hide it in a shoebox (or bury it in the backyard in the form of gold coins or something). This would drive yields up.

[KrazyHorse]

Originally posted by Kuciwalker


I thought that was the underlying assumption of any financial analysis involving Treasuries.

It's the simplest underlying risk assumption you can make, and since the risk is generally pretty low it's a good one, most of the time. It's not the only thing you can do.

[chequita guevara]

Why would the Fed default? Our debt is held in dollars. If push comes to shove, we can make more dollars. However bad inflation might be, it would probably still be better than a default, assuming default didn't come about as the result of a socialist revolution.

[edit: correction as noted by KH]

[KrazyHorse]

Originally posted by Comrade Snuggles
However bad inflation might be, it would still be better than a default

This is not necessarily true, though for most values of inflation it probably is true.

[Kidlicious]

These hedge against a price fall as well as a default don't they?

[KrazyHorse]

Originally posted by Kidicious
These hedge against a price fall as well as a default don't they?

What do, CDS? They hedge against price falls of bonds due to default risk factors. They are an imperfect hedge against bond prices because there are other considerations in the prices of bonds (interest rate risk).

[Kidlicious]

Originally posted by KrazyHorse


What do, CDS? They hedge against price falls of bonds due to default risk factors. They are an imperfect hedge against bond prices because there are other considerations in the prices of bonds (interest rate risk).

Then if these probably won't pay off in the event of a default, why would people buy them like they are?

edit: nvm. I get it.

[Aeson]

Ok, that answers my question as to why they still buy them for US treasuries. (If it only payed out in default, then it wouldn't make sense. But if it's just a hedge against a drop in value it does.)