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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 com

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
    He's making the case that the simple fact that a Treasury can have a 10-year term makes it riskier than a swap that is marked to market every 24 hours. This might be a makeable case, but just comparing the terms is not enough to do so. And, while he is using it to explain why Treasuries seem to have a risk premium now, it doesn't explain why they did not previously. Did swaps just start being m2M every 24 hours? Certainly there has been no major change to the nature of Treasuries over the past few months. So why the sudden shift?
carsongross 11y ago
I'm not making an ethical argument. I'm explaining to you why people don't understand it: the jargon. When you say "Swaps are much more like 24 hour loans" most people (here) will understand you.
anon4 11y ago
Wouldn't lending money for 24 hours be more risky, since the debtor has less time to raise money to pay you back?
- nicky0 11y ago
  On the other hand you gave them the money yesterday so it's pretty likely they still have it to give back to you.
  - anon4 11y ago
    But if they don't spend it, why did they take it in the first place?
- VLM 11y ago
  Don't forget inflation risk. Tomorrow a buck is worth about a buck. Given some nice 70s era stagflation, in a decade a buck might only be worth fifty cents. Loaning one dude a buck and getting fifty cents back isn't all that different than loaning out ten dimes and getting only five paid back. There is also downside risk. Your financial life will be about the same tomorrow as it is today, so I can reasonably estimate the odds of getting a buck back if you need change for the vending machine or whatever. Ten years from now, well, hard to say how many bad things can happen to someone in ten years.
Spooky23 11y ago
Is it really less risky? If there's any chance of a treasury default or other disruption, what happens the next day when nobody wants to be left holding the bag? Seems like in a scenario where something is up, daily liquidity is more dangerous.
- vegabook 11y ago
  there is indeed an argument that says that daily mark-to-market (with collateral reconciliation) nullifies all but the very wide tails of the distribution. So the 6-sigma risk is paradoxically increased on daily liquidity, because you're sleepwalking into taking bigger risks, on which big sigmas are never materially manifested......until they are... Basically - we're erasing "normal" counterparty risk in derivatives, in so doing blinding us to big abnormalities. Imagine an ocean with zero waves (ie a pond), until the tidal wave hits. Wouldn't it be better to have some fear of waves hitting you daily, so you're (somewhat more) prepared for "the big one"? Scarily, there are something like 70 trillion of swap contracts outstanding. Someone correct me if I am wrong (though I'd bet I'm underestimating). There is a large and growing body of evidence that huge central bank involvement in markets is increasing exactly such risks and it is an extremely important point. Still... if we consider that you wear the up-to-6 sigma risk with Treasuries (ie 99.999999% of the time - whatever the number of 9s is), but you are spared all but the 6-sigma risks in swaps, then it is probable (though I agree .. not certain), that you're better off with the mark-to-market collateral protection that you get in swaps. Thus the article's main point is erroneous. It is clear that the idea pushed by Bloomberg here, that banks have somehow become better credit quality than the US government, is wrong, as can be seen by a simple look at their equivalent-maturity borrowing rates in the bond market (well above Treasuries). IE: not comparing apples with oranges.
  - pjmorris 11y ago
    > Ts are being printed without even the slightest regard for the (old-fashioned) concept known as fiscal rectitude. > Scarily, there are something like 70 trillion of swap contracts outstanding. I guess there's 15-20T in T's outstanding... if there's 70T in swaps (that don't have a Fed or an army behind them), what would your comment on their 'fiscal rectitude' be?

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
  He's making the case that the simple fact that a Treasury can have a 10-year term makes it riskier than a swap that is marked to market every 24 hours. This might be a makeable case, but just comparing the terms is not enough to do so. And, while he is using it to explain why Treasuries seem to have a risk premium now, it doesn't explain why they did not previously. Did swaps just start being m2M every 24 hours? Certainly there has been no major change to the nature of Treasuries over the past few months. So why the sudden shift?

carsongross 11y ago

I'm not making an ethical argument. I'm explaining to you why people don't understand it: the jargon. When you say "Swaps are much more like 24 hour loans" most people (here) will understand you.

anon4 11y ago

Wouldn't lending money for 24 hours be more risky, since the debtor has less time to raise money to pay you back?

nicky0 11y ago
On the other hand you gave them the money yesterday so it's pretty likely they still have it to give back to you.
- anon4 11y ago
  But if they don't spend it, why did they take it in the first place?
VLM 11y ago
Don't forget inflation risk. Tomorrow a buck is worth about a buck. Given some nice 70s era stagflation, in a decade a buck might only be worth fifty cents. Loaning one dude a buck and getting fifty cents back isn't all that different than loaning out ten dimes and getting only five paid back. There is also downside risk. Your financial life will be about the same tomorrow as it is today, so I can reasonably estimate the odds of getting a buck back if you need change for the vending machine or whatever. Ten years from now, well, hard to say how many bad things can happen to someone in ten years.

Spooky23 11y ago

Is it really less risky? If there's any chance of a treasury default or other disruption, what happens the next day when nobody wants to be left holding the bag? Seems like in a scenario where something is up, daily liquidity is more dangerous.

vegabook 11y ago
there is indeed an argument that says that daily mark-to-market (with collateral reconciliation) nullifies all but the very wide tails of the distribution. So the 6-sigma risk is paradoxically increased on daily liquidity, because you're sleepwalking into taking bigger risks, on which big sigmas are never materially manifested......until they are... Basically - we're erasing "normal" counterparty risk in derivatives, in so doing blinding us to big abnormalities. Imagine an ocean with zero waves (ie a pond), until the tidal wave hits. Wouldn't it be better to have some fear of waves hitting you daily, so you're (somewhat more) prepared for "the big one"? Scarily, there are something like 70 trillion of swap contracts outstanding. Someone correct me if I am wrong (though I'd bet I'm underestimating). There is a large and growing body of evidence that huge central bank involvement in markets is increasing exactly such risks and it is an extremely important point. Still... if we consider that you wear the up-to-6 sigma risk with Treasuries (ie 99.999999% of the time - whatever the number of 9s is), but you are spared all but the 6-sigma risks in swaps, then it is probable (though I agree .. not certain), that you're better off with the mark-to-market collateral protection that you get in swaps. Thus the article's main point is erroneous. It is clear that the idea pushed by Bloomberg here, that banks have somehow become better credit quality than the US government, is wrong, as can be seen by a simple look at their equivalent-maturity borrowing rates in the bond market (well above Treasuries). IE: not comparing apples with oranges.
- pjmorris 11y ago
  > Ts are being printed without even the slightest regard for the (old-fashioned) concept known as fiscal rectitude. > Scarily, there are something like 70 trillion of swap contracts outstanding. I guess there's 15-20T in T's outstanding... if there's 70T in swaps (that don't have a Fed or an army behind them), what would your comment on their 'fiscal rectitude' be?