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Macro thoughts from a microcap trader: US Government worse than Lehman?
Topics: macroWarning: wonkish post ahead.
Apologies for the lack of posting. Like the rest of you, my attention has strayed to broader market issues.
I came across a crazy statistic I want to share: going into March, 2007, according to this Marketwatch report, credit default swap protection for Lehman Brothers debt cost $28,000 per $10 million of protection. That’s 28 basis points, or bps (before expanding to 33bps amidst investor concerns on March 2, 2007).
Today, Reuters reports that the cost of credit default swap protection on US 10-year Treasury Notes rose to a whopping 29.2 basis points:
The cost of insuring 10-year U.S. government debt against default rose to a record high on Wednesday as investors fretted over the feasibility of the government’s $700 billion plan to contain the financial crisis. Credit default swaps on 10-year Treasury debt expanded to 29.2 basis points — its widest ever — from 26.5 basis points on Tuesday, according to CMA, a specialised data provider.
Now I’m no expert on CDS, so if I have misread the data please set me straight, but it appears that investors currently assess the risk of default of US 10-year treasuries (as reflected in the CDS price) to be greater than that of Lehman Brothers only 18 months ago. Food for thought as the talking heads tell us the government should squander $700 billion of taxpayer funds on toxic mortgage assets.
DISCLOSURE: No positions, except a strong disagreement with the proposed wall st. bailout handout.
[...] and is forecasting an increasing likelihood that the US will not be able to pay back its debts. The default risk on 10 year government debt is now greater than the default risk that was on Lehman Brothers (which did default). With each bailout, the US government increases its [...]
i would disagree with your interpretation of the numbers.
I would say that the similarity in CDS spreads is more indicative of the insanity in the market in 2007 and how truly mispriced risk was. The fact that US treasuries are trading at the same level today does not really mean anything, at least to me.
anyway …..thanks for the post, its just another example of how crazy things can get …. kind of like the billion dollar valuations on pets.com type stocks in 2000 and stories of doctors/engineers quiting their jobs to flip condos in 2005
offthebeatenpath …..
@offthebeatenpath: thanks for your comment. I wasn’t suggesting that either today’s pricing was incorrect, or 2007’s LEH pricing was correct, but simply that today’s is higher than LEH was in 2007.
The answer may be that both markets were insane, for different reasons. Or it may mean that CDS spreads really don’t reflect perceptions of default risk (which I guess would render the ABX and TABX indeces irrelevant). After all, my understanding is that most CDS are used either to initiate a synthetic long or to embed a contractual hedge, not to initiate a tactical hedge based upon market perception.
Additionally, the relative pricing of each has a lot to do with the premiums required to offset counterparty risk between institutional investors (perceived to be low in 2007 but obviously sky high now).