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This is the second time in a week that we're falling all over ourselves wondering why swaps are through Ts. It's not hard: IRS is collateralized, Treasuries are

This is the second time in a week that we're falling all over ourselves wondering why swaps are through Ts. It's not hard: IRS is collateralized, Treasuries are not. With IRS every 3 (or 6) months, you have to cough LIBOR in order to receive the fixed leg. So essentially your maturity commitment is never greater than that, and indeed, for the vast majority of swaps receivers, mark-to-market collateral adjustments happen daily, so your credit risk is 24 hours! This is not the case for USTs where if you invest for 10 years, you have no clue for every single one of those 10 years if your principal will be repaid, and there is absolutely zero collateral adjustment. Why is this so hard for people to understand? Ts are being printed without even the slightest regard for the (old-fashioned) concept known as fiscal rectitude. Swaps can be printed all day long but if the rates start moving you get paid/have-to-pay every 24-hours for the assumed risk. It follows that Ts are now a much riskier bet than swaps, and indeed, what surprises me, is why it has taken so long for this to be happening.

carsongross 11y ago
Why is this so hard for people to understand? Here's why: > swaps are through Ts > IRS is collateralized > cough LIBOR in order to receive the fixed leg > majority of swaps receivers > mark-to-market collateral adjustments Nobody (to a second order approximation) knows what the fuck any of that means, because, since they are sane people with lives to lead, they don't delve into the details of advanced finance.
- vegabook 11y ago
  let me make it perfectly clear. Lend money for 24 hours is less risky than lend money for 10 years. Does that make sense? On your point about finance being complex. This is Bloomberg writing the story. They of all people should know. And this is the second time in a week that they're pushing this stuff. BTW: for the average finance guy the CS jargon on this site would also qualify as something to be dismissed by "sane people with lives to lead". Not a valid argument. And before you tell me that this is a CS site so that is understandable, I'll ask you why this Bloomberg stuff is making it to Page 1.
  - snowwrestler 11y ago
    No, it doesn't make sense. Risk in lending is not just the term, it's also how much you lend to whom.
    - vegabook 11y ago
      Agreed. But lending to a riskier counterparty for 24 hours is usually going to command a lower risk premium than lending to anybody, even the US government, for 10 years. That's the essence of the story here. You make a valid point though: until now it has been riskier even to lend for 24 hours to a bank because of the binary nature in which banks go bust: they're solvent until they're not, and the run can happen in an event-wise, unpredictable fashion. The real story then is that even taking into account this high banking-sector risk, the US government is now riskier. But this has much more to do with the unlimited printing of debt (the real story) than the IRS market swap spread, and my wider point is that daily margining has been ignored by many of the people (here and in the financial markets chatter) who are talking up this issue as some kind of rubicon moment. This has been in the making for years and the slow grind below zero is not something that should be seen as extraordinary, nor, given the aforementioned slow grind lower, should it come as any surprise that it can go negative.
      - snowwrestler 11y ago
        > But this has much more to do with the unlimited printing of debt (the real story) than the IRS market swap spread I don't get how U.S. debt is the driving factor. The rate of federal net debt growth has actually been slowing over the past ~3 years as the federal deficit has shrunk, i.e. the arrow is pointed in the right direction.
    - tobltobs 11y ago
      Sure it makes sense. He tried to explain the influence of term on risk calculation. Nowhere he stated that it is the only factor.
      - snowwrestler 11y ago
ashark 11y ago
> Every 3 (or 6) months, you have to cough LIBOR in order to receive the fixed leg. > Why is this so hard for people to understand? Question answered by earlier sentence in own post. Unless this was a joke?
- vegabook 11y ago
  apologies. It's not obvious because the jargon is opaque (though I still question why, if it's not understood, it's upvoted to page 1). In swaps, as the word suggests, you must pay (the prevailing short-term interest rate) every few months for the right to receive a pre-agreed (long term) interest rate. The key is that you must pay, and if your counterparty does not pay, you will not pay either. So you have a much lower credit risk than an outright lending of money since if the counterparty starts failing, you can stop paying. Sure there is still some credit risk, but it's nowhere near as high as it would be to lend money for 10 years "naked". And since the crisis, moreover, we have "daily margining", that is, if you win in any 24 hour period, your counterparty must pay your winnings. If he doesn't you can cancel the contract. That's much lower risk than betting on repayment with no feedback, for 10 years. I'm just generally quite "surprised" that this stuff is coming out of Bloomberg who should know better.
  - gmarx 11y ago
    very clear. Thanks
carsongross 11y ago
vegabook, I encourage you to make a non-hostile comment explaining in plain english how swaps are much closer to 24 hour loans than the underlying securities. This is a good explanation and deserves to be near the top of the comments on this article. The jargon and tone of your original comment is the reason it is being down voted.
kal31dic 11y ago
I think perhaps you aren't looking at this clearly, because with a swap you have exposure to forward credit spread premium - the market's implied expectations about where LIBOR will be versus the rate from the near risk free overnight rate curve. In 2008 this blew out, and in spite of institutional changes, it's still possible that one day this might happen again. So you do in fact have a long term exposure to forward credit quality, just as you do with UST, except that the clearing house has no taxing power and cannot print money. The primary deficit is shrinking, whatever one may think of Mr Obama - and that's hardly surprising when you look at unemployment. So your claim about causality requires further articulation. It's also not the case that a UST position is not collateralised. If I sell short 100 mm tens, and I borrow these on the market against cash collateral from my receipt from the sale then if the price drops 10 points I get that back in my bank account - just as with a cleared swap position.

carsongross 11y ago

Why is this so hard for people to understand? Here's why: > swaps are through Ts > IRS is collateralized > cough LIBOR in order to receive the fixed leg > majority of swaps receivers > mark-to-market collateral adjustments Nobody (to a second order approximation) knows what the fuck any of that means, because, since they are sane people with lives to lead, they don't delve into the details of advanced finance.

vegabook 11y ago
let me make it perfectly clear. Lend money for 24 hours is less risky than lend money for 10 years. Does that make sense? On your point about finance being complex. This is Bloomberg writing the story. They of all people should know. And this is the second time in a week that they're pushing this stuff. BTW: for the average finance guy the CS jargon on this site would also qualify as something to be dismissed by "sane people with lives to lead". Not a valid argument. And before you tell me that this is a CS site so that is understandable, I'll ask you why this Bloomberg stuff is making it to Page 1.
- snowwrestler 11y ago
  No, it doesn't make sense. Risk in lending is not just the term, it's also how much you lend to whom.
  - vegabook 11y ago
    Agreed. But lending to a riskier counterparty for 24 hours is usually going to command a lower risk premium than lending to anybody, even the US government, for 10 years. That's the essence of the story here. You make a valid point though: until now it has been riskier even to lend for 24 hours to a bank because of the binary nature in which banks go bust: they're solvent until they're not, and the run can happen in an event-wise, unpredictable fashion. The real story then is that even taking into account this high banking-sector risk, the US government is now riskier. But this has much more to do with the unlimited printing of debt (the real story) than the IRS market swap spread, and my wider point is that daily margining has been ignored by many of the people (here and in the financial markets chatter) who are talking up this issue as some kind of rubicon moment. This has been in the making for years and the slow grind below zero is not something that should be seen as extraordinary, nor, given the aforementioned slow grind lower, should it come as any surprise that it can go negative.
    - snowwrestler 11y ago
      > But this has much more to do with the unlimited printing of debt (the real story) than the IRS market swap spread I don't get how U.S. debt is the driving factor. The rate of federal net debt growth has actually been slowing over the past ~3 years as the federal deficit has shrunk, i.e. the arrow is pointed in the right direction.
  - tobltobs 11y ago
    Sure it makes sense. He tried to explain the influence of term on risk calculation. Nowhere he stated that it is the only factor.
    - snowwrestler 11y ago

ashark 11y ago

> Every 3 (or 6) months, you have to cough LIBOR in order to receive the fixed leg. > Why is this so hard for people to understand? Question answered by earlier sentence in own post. Unless this was a joke?

vegabook 11y ago
apologies. It's not obvious because the jargon is opaque (though I still question why, if it's not understood, it's upvoted to page 1). In swaps, as the word suggests, you must pay (the prevailing short-term interest rate) every few months for the right to receive a pre-agreed (long term) interest rate. The key is that you must pay, and if your counterparty does not pay, you will not pay either. So you have a much lower credit risk than an outright lending of money since if the counterparty starts failing, you can stop paying. Sure there is still some credit risk, but it's nowhere near as high as it would be to lend money for 10 years "naked". And since the crisis, moreover, we have "daily margining", that is, if you win in any 24 hour period, your counterparty must pay your winnings. If he doesn't you can cancel the contract. That's much lower risk than betting on repayment with no feedback, for 10 years. I'm just generally quite "surprised" that this stuff is coming out of Bloomberg who should know better.
- gmarx 11y ago
  very clear. Thanks

carsongross 11y ago

vegabook, I encourage you to make a non-hostile comment explaining in plain english how swaps are much closer to 24 hour loans than the underlying securities. This is a good explanation and deserves to be near the top of the comments on this article. The jargon and tone of your original comment is the reason it is being down voted.

kal31dic 11y ago

I think perhaps you aren't looking at this clearly, because with a swap you have exposure to forward credit spread premium - the market's implied expectations about where LIBOR will be versus the rate from the near risk free overnight rate curve. In 2008 this blew out, and in spite of institutional changes, it's still possible that one day this might happen again. So you do in fact have a long term exposure to forward credit quality, just as you do with UST, except that the clearing house has no taxing power and cannot print money. The primary deficit is shrinking, whatever one may think of Mr Obama - and that's hardly surprising when you look at unemployment. So your claim about causality requires further articulation. It's also not the case that a UST position is not collateralised. If I sell short 100 mm tens, and I borrow these on the market against cash collateral from my receipt from the sale then if the price drops 10 points I get that back in my bank account - just as with a cleared swap position.