Wide BAC CDS but low Ted spread

Discussion in 'Trading' started by Cyrix, Aug 12, 2011.

  1. Cyrix


    Bank of America CDS is now closed to Lehman moment levels, so are the CDS' of some other financial institutions.


    But Ted spread is still very low.

    So with this kind of banking stress the market is not seeing any liquidity pressure?
  2. Two main reasons:
    a) perceived riskless quality of a t-bill/UST is gone, so the "T" part of the spread isn't quite what it used to be.
    b) various backstops are now in place.

    There's more, but it would be a long discussion.
  3. Cyrix


    US Sov CDS still lower than the level at Lehman moment, so the first factor is not a big reason.
  4. You're incorrect. Also, you should really stop looking as sov CDS in general, and US sov CDS in particular. It's the stupidest and yet most widely publicized and referenced financial product in existence.
  5. m22au


    Martinghoul - I agree that US Sov CDS is silly, especially given the near-zero chance of a US default.

    But for Eurozone countries (especially the PIIGS) who can't print away their debt - why would the Sov CDS be irrelevant and "stupid" ?
  6. Because we know that it won't pay out. ISDA (and the European authorities) have stated that the Private Sector Involvement (PSI) currently happening in GGBs (Greek sov bonds) - a restructuring by anyone sane's definition - does NOT constitute a credit event. So, to be sure, if you're long GGBs and hold sovereign CDS as "protection", your bond will be restructured (in one of the arcane ways that will be proposed shortly), you will suffer a haircut, but your CDS counterparty will NOT pay you a penny. There are also other silly things about sov CDS (e.g. the redenomination clause that applies to some countries and not others; the fact that it will potentially have to be contested by a domestic court, etc).

    So let me reiterate... Sov CDS is a sh1t product that is inadequately defined, poorly thought out and used by too many journalists who have never actually bothered to read the fine print. Sov CDS should be banned and anyone punting it without adult/legal supervision should be barred from the financial industry.
  7. m22au


    Thanks for the explanation Martinghoul
  8. Cyrix


    1. (to m22au) The chance of US default is not near zero.
    2. But it is not priced in the market yet. (to Martinghoul) If you don't like to look at the Silly Sov CDS as you call it then you can look at the extremely low treasury yields.
    3. which still shows your first factor is not a main reason.

    4. There's not such thing as a silly security but silly prices.
    If you think it's priced too rich then you short it, if you think it's too cheap then you buy it.
  9. +1 to everything Martinghoul said. it's much better to just trade exchange traded and cleared products. ok here's your scenario - the USGOV CDS explodes higher b/c of X reason. as martinghoul correctly stated under no circumstances will the ISDA consider this a default (if the same happened to any other country this wouldn't happen either as he said).

    but put prices would explode higher b/c in all likely hood the same factor causing CDS to go higher would cause the spx to go lower so you'd benefit from an intrinsic value and IV increase. the OCC can't just wake up one day and say "you know what, we're not going to allow put holders to profit so you're all SOL".

    martinghoul hit the nail on the head and offered excellent analysis from another much overlooked angle (most people think how to profit from a trade instead of completely following it through and asking if the instrument will pay out like you think).

    this is why et is a great community. oh cyrix brought up a great point re selling cds if you think the prices are silly. the CDS for greece collapsed after the bailout was announced. all the hedgies buying CDS hoping for disaster were EXACTLY right yet lost money (a lot of it). the people who knew the product and sold protection made a lot of money.
  10. Extremely low treasury yields are not solely a function of sov credit, so you cannot draw the conclusion that it's not my first factor based on absolute low yields alone. Moreover, I never said that it's the main reason. To convince yourself that the deteriorating creditworthiness of the US is at least partly to blame you just need to look at what happened to LIBOR/GC recently. Overall, conditions in the money mkts are very different now from what they were in 08, which is why have not been seeing the same symptoms recently (i.e. widening LIBOR/OIS, TED & swapspreads). You may choose to not believe me, but this is something that I have actually been thinking about long and hard recently, while looking for "cheap" blowup hedges.
    I disagree... Suppose I give you a futures contract where the underlying for delivery is either: nothing, 1000 barrels of oil, 91 metric tons of rice or 100 troy ounces of gold. Which one of those the contract settles to is chosen at random. Let's say it's priced at arnd 466. Would you buy it or sell it?
    #10     Aug 14, 2011