10 ms·

US 5-year credit default swaps rise to highest since 2011

146 points by almog 3y ago

mupuff1234 3y ago
Should I be worried about money currently sitting in money market funds (VUSXX)?
- rpvnwnkl 3y ago
  That might be a good question for chatGPT
  - episteme 3y ago
    Why?
  - DontchaKnowit 3y ago
    God were only like a few months in and im already so annoyed with people bringing up chat gpt. No this isnt a good question for chat gpt because chatgpt has no critical thinking skills, which is the foundation of a sound investment strategy. Chat gpt is trained on the internet. The ratio of bad advice to good advice on the internet is about a million to one.
- NotYourLawyer 3y ago
  Nothing I ever say is investing advice or legal advice. It I’m not worried.
- lumost 3y ago
  Not your finance person, but a good way to think about an abstract event like “US debt default” is through two lenses. 1) it’s an event that can’t happen unless a lot of powerful folks take a bath. Odds are good that energy will be directed to prevent it - or failing the ability to muster energy, you won’t care. 2) If the dollar collapses, what asset would you want to hold? Would it make sense to hold that asset absent a crash?
  - radicaldreamer 3y ago
    For (2) - obvious answer here is crypto but again, the crypto market might implode because if (1) actually happens, the US gov is extremely incentivized to make crypto ownership and trading illegal.
    - unusualmonkey 3y ago
      There's nothing obvious about crypto being a good asset if the us govt. defaults.
      - ur-whale 3y ago
        > There's nothing obvious about crypto being a good asset if the us govt. defaults. Says you, and without even the hint of an argument to back your position.
    - lumost 3y ago
      Crypto may be a bad bet in a world where the dollar implodes. If crypto is predominantly healed by dollar holders - rebalancing from crypto to the dollar denominated assets they need to function could harm crypto prices. Alternately, in the event of a dollar default - the world may not be conducive to the capex+energy expenditure required to mine crypto. If interest rates went to 20-30%, I’m not sure that crypto mining would be a viable concern - causing instability throughout the crypto world. That being said, whether crypto is a good hedge or not really depends on whether it’s worth putting money in today - regardless of the potential for US default. Particularly in comparison to Yen, euro, and yuan assets.
      - dannyw 3y ago
        Crypto mining is self adjusting, and Ethereum doesn't use mining anymore.
    - htss2013 3y ago
      If the US government outlawed crypto to save the USD, they'd have to also outlaw gold, because that's where all the money would flow to instead. The rest of the world wouldn't outlaw gold and crypto, so the effort to kill alternatives would fail and it would just accelerate fleeing USD into gold and crypto.
techie128 3y ago
[flagged]
- michaelmarkell 3y ago
  This reads like it was written by ChatGPT
  - techie128 3y ago
    ChatGPT was trained on text written by humans, so its not a surprise that you're confusing text written by a human with one written by ChatGPT.
    - nomel 3y ago
      The downvotes of your comment are interesting. Regardless if it's written by AI, I think it's good evidence that humans are almost certainly going to need to modify their writing style, to appear "more human".
  - atwebb 3y ago
    There are 4 comments in this thread (5 including mine) and ChatGPT is already mentioned twice. Interesting how quickly things adapt/change.
  - nickvanw 3y ago
    Asking ChatGPT "Why does the price of a Credit Default Swap rise?" gets you: > The price of a Credit Default Swap (CDS) rises when the market perceives an increased risk of default by the underlying entity, such as a company or government. > A CDS is a financial instrument that allows investors to protect themselves against the risk of default by an issuer of debt. The buyer of a CDS pays a premium to the seller, who agrees to pay a fixed amount in the event of a default. The price of the CDS reflects the perceived risk of default by the underlying entity. > If the market perceives an increased risk of default by the underlying entity, such as due to a weakening financial position, deteriorating economic conditions, or a downgrade in credit rating, then the price of the CDS will rise. This is because investors will demand a higher premium to compensate for the increased risk. > Conversely, if the market perceives a reduced risk of default, such as due to an improvement in the financial position or a credit rating upgrade, then the price of the CDS will fall, as investors require a lower premium to compensate for the lower risk. I think it sounds that way because it probably was!
ucha 3y ago
Relevant Matt Levine: "Why Would Anyone Buy Credit Default Swaps on the U.S.?" https://archive.is/r0lI2 https://archive.is/r0lI2
- H8crilA 3y ago
  To be honest there were countries that defaulted on their sovereign bonds in their home fully controlled currency. Russia did this in the late 90s and took down LTCM, which was collecting premiums for insuring something that they thought is too illogical to ever occur. Well, it did occur. The reason why this is illogical is that there is very little distinction between "the dollar" and US sovereign debt. It applies to all countries in a similar situation, for example "the Yen" and Japanese Government Bonds. It doesn't quite apply to odd cases like, IDK, Spanish sovereign debt in EUR and "the Euro" since the Spanish government does not control all forms of the issuance of the currency of the bond.
  - btilly 3y ago
    I don't believe that LTCM was insuring anything. What they were doing is identifying pairs of securities whose values had diverged and they believed would eventually converge. They would short the more expensive one and buy the cheap one. When they converged they would sell the no longer cheap one, use the money to close out the no longer expensive one, and collect a profit. However usually the reason why one was more expensive is that it had a more liquid market. So people could safely invest in it with money that they might need back quickly. This shouldn't matter if you planned to buy and hold though..at least in theory. But in the wake of the Russian default, liquidity became more valued. So people sought to get rid of illiquid securities and buy liquid ones. This meant that LTCM had shorted things that were rising in value, and bought things that were falling in value. So they had a loss. And as the shorts got higher, they wound up having to sell assets at a loss to cover their shorts. And now the temporary losses became very real ones, and drove them bankrupt. However, infamously, their investments made money in the end. They just weren't able to last long enough to benefit from it.
    - Scoundreller 3y ago
gtop3 3y ago
The debt ceiling functions primarily to give negotiation leverage to the minority party. The problem is, if the threat of not raising the ceiling is executed on then it hurts both parties. Even the possibility that the debt ceiling will not be raised is collectively hurting us. This credit default swap is one signal of the negative impact these debt ceilings negotiations have. We really need a reform on the way the US handles debt, one that provides more predictability. A no-nonsense solution would be to make raising the debt ceiling part of the annual budget or any bill that that has an impact on the budget. Another potential solution would be to make increases on the debt ceiling automatic based on a percentage of GDP, or over time. Another solution would be to reduce the national debt. We have options, and it almost doesn't matter what we choose because our current path is too volatile.
- zrail 3y ago
  The most straightforward option would be to just get rid of it. It has not made any sense since the 1970s when Congress gained direct control over the budget. The actual thing that the debt ceiling does is stop the Treasury from issuing debt to pay for things Congress has already decided to pay for. It's bonkers. Also, it's not just "the minority party". Ever single debt ceiling crisis since 1995 when the Gephart Rule was repealed has been instigated by the Republican Party.
  - downWidOutaFite 3y ago
    Republicans had no problem raising the debt limit 4 times after Trump's tax cuts produced trillion dollar deficits.
    - deleted 3y ago
      [deleted]
    - zrail 3y ago
      Of course. They were in charge at the time, see.
  - bfdm 3y ago
Scubabear68 3y ago
The theory and the practice of CDS’ have always been wildly different. In theory, a CDS is “insurance” if a bond issuer defaults. In reality, CDS’ are used to go in and out of positions on companies because contracts are too difficult and expensive to cancel. The end result is big firms end up with huge, complicated CDS positions all over the place for 5-10 years until the contracts cancel. A CDS on the United States is another stupid end result just like CDO2 vehicles were. The CDS market is just so incredibly flawed when markets are stressed.
black_13 3y ago
[dead]

146 points by almog 3y ago

mupuff1234 3y ago

Should I be worried about money currently sitting in money market funds (VUSXX)?

rpvnwnkl 3y ago
That might be a good question for chatGPT
- episteme 3y ago
  Why?
- DontchaKnowit 3y ago
  God were only like a few months in and im already so annoyed with people bringing up chat gpt. No this isnt a good question for chat gpt because chatgpt has no critical thinking skills, which is the foundation of a sound investment strategy. Chat gpt is trained on the internet. The ratio of bad advice to good advice on the internet is about a million to one.
NotYourLawyer 3y ago
Nothing I ever say is investing advice or legal advice. It I’m not worried.
lumost 3y ago
Not your finance person, but a good way to think about an abstract event like “US debt default” is through two lenses. 1) it’s an event that can’t happen unless a lot of powerful folks take a bath. Odds are good that energy will be directed to prevent it - or failing the ability to muster energy, you won’t care. 2) If the dollar collapses, what asset would you want to hold? Would it make sense to hold that asset absent a crash?
- radicaldreamer 3y ago
  For (2) - obvious answer here is crypto but again, the crypto market might implode because if (1) actually happens, the US gov is extremely incentivized to make crypto ownership and trading illegal.
  - unusualmonkey 3y ago
    There's nothing obvious about crypto being a good asset if the us govt. defaults.
    - ur-whale 3y ago
      > There's nothing obvious about crypto being a good asset if the us govt. defaults. Says you, and without even the hint of an argument to back your position.
  - lumost 3y ago
    Crypto may be a bad bet in a world where the dollar implodes. If crypto is predominantly healed by dollar holders - rebalancing from crypto to the dollar denominated assets they need to function could harm crypto prices. Alternately, in the event of a dollar default - the world may not be conducive to the capex+energy expenditure required to mine crypto. If interest rates went to 20-30%, I’m not sure that crypto mining would be a viable concern - causing instability throughout the crypto world. That being said, whether crypto is a good hedge or not really depends on whether it’s worth putting money in today - regardless of the potential for US default. Particularly in comparison to Yen, euro, and yuan assets.
    - dannyw 3y ago
      Crypto mining is self adjusting, and Ethereum doesn't use mining anymore.
  - htss2013 3y ago
    If the US government outlawed crypto to save the USD, they'd have to also outlaw gold, because that's where all the money would flow to instead. The rest of the world wouldn't outlaw gold and crypto, so the effort to kill alternatives would fail and it would just accelerate fleeing USD into gold and crypto.

techie128 3y ago

[flagged]

michaelmarkell 3y ago
This reads like it was written by ChatGPT
- techie128 3y ago
  ChatGPT was trained on text written by humans, so its not a surprise that you're confusing text written by a human with one written by ChatGPT.
  - nomel 3y ago
    The downvotes of your comment are interesting. Regardless if it's written by AI, I think it's good evidence that humans are almost certainly going to need to modify their writing style, to appear "more human".
- atwebb 3y ago
  There are 4 comments in this thread (5 including mine) and ChatGPT is already mentioned twice. Interesting how quickly things adapt/change.
- nickvanw 3y ago
  Asking ChatGPT "Why does the price of a Credit Default Swap rise?" gets you: > The price of a Credit Default Swap (CDS) rises when the market perceives an increased risk of default by the underlying entity, such as a company or government. > A CDS is a financial instrument that allows investors to protect themselves against the risk of default by an issuer of debt. The buyer of a CDS pays a premium to the seller, who agrees to pay a fixed amount in the event of a default. The price of the CDS reflects the perceived risk of default by the underlying entity. > If the market perceives an increased risk of default by the underlying entity, such as due to a weakening financial position, deteriorating economic conditions, or a downgrade in credit rating, then the price of the CDS will rise. This is because investors will demand a higher premium to compensate for the increased risk. > Conversely, if the market perceives a reduced risk of default, such as due to an improvement in the financial position or a credit rating upgrade, then the price of the CDS will fall, as investors require a lower premium to compensate for the lower risk. I think it sounds that way because it probably was!

ucha 3y ago

Relevant Matt Levine: "Why Would Anyone Buy Credit Default Swaps on the U.S.?" https://archive.is/r0lI2 https://archive.is/r0lI2

H8crilA 3y ago
To be honest there were countries that defaulted on their sovereign bonds in their home fully controlled currency. Russia did this in the late 90s and took down LTCM, which was collecting premiums for insuring something that they thought is too illogical to ever occur. Well, it did occur. The reason why this is illogical is that there is very little distinction between "the dollar" and US sovereign debt. It applies to all countries in a similar situation, for example "the Yen" and Japanese Government Bonds. It doesn't quite apply to odd cases like, IDK, Spanish sovereign debt in EUR and "the Euro" since the Spanish government does not control all forms of the issuance of the currency of the bond.
- btilly 3y ago
  I don't believe that LTCM was insuring anything. What they were doing is identifying pairs of securities whose values had diverged and they believed would eventually converge. They would short the more expensive one and buy the cheap one. When they converged they would sell the no longer cheap one, use the money to close out the no longer expensive one, and collect a profit. However usually the reason why one was more expensive is that it had a more liquid market. So people could safely invest in it with money that they might need back quickly. This shouldn't matter if you planned to buy and hold though..at least in theory. But in the wake of the Russian default, liquidity became more valued. So people sought to get rid of illiquid securities and buy liquid ones. This meant that LTCM had shorted things that were rising in value, and bought things that were falling in value. So they had a loss. And as the shorts got higher, they wound up having to sell assets at a loss to cover their shorts. And now the temporary losses became very real ones, and drove them bankrupt. However, infamously, their investments made money in the end. They just weren't able to last long enough to benefit from it.
  - Scoundreller 3y ago

gtop3 3y ago

The debt ceiling functions primarily to give negotiation leverage to the minority party. The problem is, if the threat of not raising the ceiling is executed on then it hurts both parties. Even the possibility that the debt ceiling will not be raised is collectively hurting us. This credit default swap is one signal of the negative impact these debt ceilings negotiations have. We really need a reform on the way the US handles debt, one that provides more predictability. A no-nonsense solution would be to make raising the debt ceiling part of the annual budget or any bill that that has an impact on the budget. Another potential solution would be to make increases on the debt ceiling automatic based on a percentage of GDP, or over time. Another solution would be to reduce the national debt. We have options, and it almost doesn't matter what we choose because our current path is too volatile.

zrail 3y ago
The most straightforward option would be to just get rid of it. It has not made any sense since the 1970s when Congress gained direct control over the budget. The actual thing that the debt ceiling does is stop the Treasury from issuing debt to pay for things Congress has already decided to pay for. It's bonkers. Also, it's not just "the minority party". Ever single debt ceiling crisis since 1995 when the Gephart Rule was repealed has been instigated by the Republican Party.
- downWidOutaFite 3y ago
  Republicans had no problem raising the debt limit 4 times after Trump's tax cuts produced trillion dollar deficits.
  - deleted 3y ago
    [deleted]
  - zrail 3y ago
    Of course. They were in charge at the time, see.
- bfdm 3y ago

Scubabear68 3y ago

The theory and the practice of CDS’ have always been wildly different. In theory, a CDS is “insurance” if a bond issuer defaults. In reality, CDS’ are used to go in and out of positions on companies because contracts are too difficult and expensive to cancel. The end result is big firms end up with huge, complicated CDS positions all over the place for 5-10 years until the contracts cancel. A CDS on the United States is another stupid end result just like CDO2 vehicles were. The CDS market is just so incredibly flawed when markets are stressed.

black_13 3y ago

[dead]