Comments on: Making sense of the market in US CDS A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: 2Borknot2B Fri, 04 Oct 2013 18:28:17 +0000 At this time the areas getting the most activity are shady areas. Trying to protect the casino bets. Buying delusional insurance to pay for a bet on which way a particular market will fall. Then create the situation you want to happen (or rigging) the market to collect on the insurance that is bought and paid for buy USA workers. It is like a cheater at a casino who knows how to count cards allowing him to rob the house. At this point, money is just binary symbols bouncing around a cow casino.

By: alea Fri, 04 Oct 2013 13:45:14 +0000 “Think about it this way: if I roll over my debts, then my total debt does not actually increase.”
Yes it does. US Debt is accounted on a principal basis only, rolling over implies paying the last coupon and that does increase the debt level.

By: TBV Fri, 04 Oct 2013 02:45:44 +0000 I think selling pressure on the USDollar will precede Tbond selling, so watch the trade-weighted value of the USD, not CDS prices on Tbonds.

By: Sandrew Thu, 03 Oct 2013 23:04:32 +0000 FS: “[W]ith Jack Lew (or anybody else, really) as Treasury secretary, you can be sure that debt service payments would be priority number one.”

Reuters’ Jason Lange: “Many analysts speculate that the Treasury would give preference to some bills over others in an attempt to keep [from missing a debt payment], but a senior Treasury official told journalists on Thursday it would be impossible to prioritize payments on debt, as some Republicans on Capitol Hill have proposed.” [ 03/us-usa-fiscal-treasury-idUSBRE9920KA2 0131003]

I’m not sure what to make of the senior official’s “impossible to prioritize” comment. I came up with a few plausible possibilities:

(1) Impossible = “not legally authorized” — i.e, Treasury believes it would be illegal (e.g., unconstitutional) for it to prioritize payments.
(2) Impossible = “not technologically operationalizable” — i.e. Treasury believes that, even if it wanted to prioritize and was so authorized, it could not technologically make that happen.
(3) Impossible = “over my dead body [will I prioritize]” — i.e. Even if Treasury could technologically prioritize and was legally authorized, it simply would choose not do it. I can imagine a few plausible reasons for an unwillingness to prioritize: (a) Treasury thinks it would be politically unwise; (b) Treasury finds it unethical; (c) Treasury would rather risk credibility with bondholders than set a bad precedent–lest a future Secretary Cruz use it as a pretext for not paying Obamacare debts.
(4) Impossible = “I want you to think its impossible.” — i.e. Treasury is willing, authorized, and able to prioritize when the time comes. It’s merely (though wisely) bluster.

Of course, these aren’t mutually exclusive. And I have no idea which is most probable. Felix, you seem to think it’s #4.

But whichever it is, I find #2 (technological impossibility) to be the scariest. It implies that the proximate, technical consequence of credit ceiling inaction is… unknown. Worse still, it’s at the whim of a mammoth payment infrastructure that very possibly no one individual actually understands or is capable of understanding. If so, the consequence is unknowable. Somewhere, a series of machine logic gates is predestined to behave a particular way when Payment Zero is owing and The Balance is insufficient. Somewhere, an unknown mechanical arbiter lurks, controlling the fate of who gets paid what… or at all. Maybe the system will get trapped in an infinite loop, with no one getting paid. It’s like the Y2K uncertainty all over again! Perhaps that should be comforting. After all, Y2K was a dud. Alas, it isn’t.

By: BrianRomanchuk Thu, 03 Oct 2013 20:51:22 +0000 There is a debate over this, but the I think view of the Treasury was that they cannot prioritise spending, other than within the day. By the end of the day, all bills had to be paid. (This was in a court submission in the 1980s, from what I recall.) In practice, this would imply a default given the lumpiness of Treasury payments. There are plenty of Republicans who disagreed with that interpretation, but I do not know what their justification is.

There was a technical default on some retail Treasury investor products in the late 1970s. I saw that in an article on Forbes. (Debt ceiling problem, back office mixup over New Year’s.)

In any event, if the U.S. really defaulted with a big rightdown, would your counterparties really be able to pay up? I do not think this a market to take too seriously.

By: GRRR Thu, 03 Oct 2013 19:32:10 +0000 You’ll have to educate me, Felix. I thought that Treasury didn’t have the ability to prioritize payments, therefore first-in = first-out.

By: ScottHavens Thu, 03 Oct 2013 18:36:16 +0000 “…you can be sure that debt service payments would be priority number one.”

There is neither legal basis nor technical ability for Treasury to prioritize payments.