…agency ten year bond.
…agency ten year bond.
and a big wave out to anglo
3-month US treasuries head back to zero. The flight to safety ain’t over by a long shot.
i’ve been saying it for the last two years…everything is going to fall, every single thing.
Been short the market for a long time and long Bunds and treasuries…
And i still believe that this is only starting, we are still on the downward slope.
Dow will hit 7k, maybe even lower, but i’m closing my shorts out there. USD/Eur will reverse and dollar will drop.
You can arb the spreads on Euro Bonds right now, playing the credit risk vs the cds market…nice carry on that.
But, corp bonds, cmbs, mbs, acs, everything to drop…equities still haven’t priced in the recession…
But bond bond bonds, spreads are amazing, TED is huge and confidence is all but gone…
My earlier post here might have been a bit short.
I view Anglo as a Commercial Mortgage bank. If AAA CMBS is Libor +12%, then (in theory) investing in Anglo you’d get the whole book (AAA, mezz and Below). In effect, your capital injection is on the Below bit. Private equity would be very very expensive.
I don’t understand the swaps bit, but it sounds awfully derivative-not-coping-with-Black-Swan-event like. Given the size of the bond market, this could be awful.
The TIPS bit shows the incredible flight to safety in my view. I simply cannot believe that there will be ZERO inflation over a ten year period.
reuters.com/article/bondsNew … 0320081119
Long dated swaps are used by insurers/pensions to hedge their long dated liabilities - 30y or 40y. That has been
the dominant flow in the long end of swap markets for years.
Long dated swaptions* are highly convex - as the market rallies dealers find that
they have become short the long end. All the the banks need to receive fixed at the same time to hedge this risk.
Result: swaps rates collapse and the spread to government bonds is irrelevant in the short-term.
Implied inflation from linkers (or TIPs in us) is extracted by comparing TIPs and treasury yield curves. Flight to quality affects
both curves equally so I don’t agree low implied inflation is about flight to quality.
Deflation is death to the same insurers/pensions with long dated liabilities because their unhedged liabilities grow in real terms in a
deflation scenario. They are the guys who are buying and it shows you how scared of deflation they really are.
- e.g. client has right to receive fixed at X% pay floating for 30y in 10y time. The price depends on the markets view of 30y vol in 10y time.
So anyone who buys long-dated bonds as a store of capital for long-term liabilities (pension funds and insurers) also buys swaps of some sort to ensure that they get a minimum yield? In effect they are derivatives that provide them insurance against their inability at some future date to get the yield they require?
Also thanks for the update on TIPS - that is scary news.
it really depends on what kind of risk they want to run.
Alot of companies want to run a spread risk, and as such will enter asset swap packages. They hope, that the credit risk of thier asset remains the same, the value increase slightly and they have the market risk hedged out by swapping the fixed rate for Libor plus a spread…
This is your simple delta risk or interest rate risk.
Alot of bonds have a callable nature, and as rates drop, and expectations of rates drop, the bonds become more liley to be called and re-financed…introducing convexivity. This element is magnified the further you go out the yield curve as sensitivity increases. Increased sensi’s drive the risk further up or down depending on your position.
So, once, wehre you thought you were hedged you now find that vega (convexivity) has pushed you into a short position that increases your exposure. Of course you can try and hedge this out at this time but thats very costly, and its pretty much too late by then.
Alot of these situations are arrising from callable bonds, swaptions and so on. Also, as the dude mentioned there are an absolute shit-load of different type of CMS coupon bearing bonds out there. Alot of these are paying zip…I don’t have numbers to hand but i did read somewhere that there are almost 600 billion in funky bonds floating around…yielding zip.
alot of the FI market is massively dislocated at the moment, hence these crazy situations…and its a time like these, when you are at extreme movements you see the other greeks coming into play…
Oh to be an option trader right now, brown pants time…but amazing if you on the right side of things…
Nicole Elliott from Mizhuo gives an analysis of US treasuries in a particular style:
money.cnn.com/2008/11/26/markets … /index.htm
(Courtesy of SomeAssemblyRequired)
The table below shows generic spreads for a selection of ABS. Although very little is being traded, there’s very little demand. There is absolutely no way of funding mortgages (or any other debt) via securitisation without government intervention. Imagine passing these spreads on to borrowers
Spreads (bps) AAA AAA AA AA A A BBB BBB Oct'07 Nov'08 Oct'07 Nov'08 Oct'07 Nov'08 Oct'07 Nov'08 UK RMBS 26 400 60 650 110 1500 175 2000 Spanish RMBS 55 500 110 1100 180 2000 350 2500 BtL RMBS 70 1000 130 1600 180 2100 300 3000 Nonconform RMBS 90 1200 150 1600 250 2100 400 3000 CMBS 55 1000 100 1500 170 2000 250 2500 CC 60 600 150 1000 220 1500 350 2000 Lease 40 450 90 1000 150 1500 225 2000 SME 65 750 150 1500 250 2000 400 2500
Data taken from 22Oct07 and 28Nov08. Note that by Oct 07 Spreads had already started to widen. Spreads continued to widen during Nov08
now i am not too well up and dont really understand any of the swaps and financial instruments out there to hedge risk (i presume?). But how in gods name is buying US T Bills a flight to safety considering the world has more t bills than toilet paper?
*Demand for U.S. Treasury bonds surged Wednesday, lowering the yield on the benchmark note to an all-time low, as investors responded to grim economic data and falling mortgage rates.
The closely watched 10-year note rose 1-3/32 to 106-18/32, and its yield fell to 2.99% from late Tuesday’s 3.10%. The yield on this note has never gone below 3% in its 46-year history.*
considering the deficits the US has, the debt, the bailouts, losing wars everywhere, this is fryingpan/into the fire panic. reminds me of dougal on the plane and pressing the red button
maybe this is whats driving down gold today? looks like a golden opportunity to buy gold
this is class
Hank Paulson - AKA financial terrorist
alot of this is just the rush over the turn…y.end and all that…
Might be time to move out of bonds and just into cash!
edit: maybe not just yet:
Treasuries bubble danger
Posted by Izabella Kaminska on Dec 10 10:25
As noted, the flight to safety is taking on epic proportions. With that in mind our thoughts are going to what may happen next, or specifically, the implications of a Treasuries bubble. Here’s one view from Monument Securities (our emphasis): More…
Hmmmm, not good.