Quote from tradingjournals:
I like the Indonesian currency, but I do not know where to buy it. Could someone do a research on brokers that have it on their list?
Default Insurance Has Some Quirks
By SERENA NG And GREGORY ZUCKERMAN
Investors looking for protection against a U.S. debt default could be in for a surprise. In the market for credit default swaps, it is currently more expensive to buy one-year insurance on Treasurys than on "junk"-rated Indonesian bonds.
The unexpected price differential is one of many quirks of the market for U.S. credit default swaps, a small corner of the financial system that has been thrown into the spotlight by Washington's tortuous talks over raising the debt ceiling.
For the week ended July 15, the value of outstanding swaps on the U.S. climbed to a new high after major credit-rating firms placed the nation's top triple-A bond rating on review for a downgrade, as progress on the debt talks appeared to stall ahead of an Aug. 2 deadline.
As of July 15, the net amount of credit protection outstanding on the U.S. was more than that of Greece, according to the Depository Trust and Clearing Corp., which collects data on completed trades.
Currently, one-year protection against a U.S. default is roughly double that of other triple-A-rated nations such as the U.K. and Germany, and that of Saudi Arabia, which is rated AA-, according to data from Markit. It also costs 47% more to insure the U.S. from default than Indonesia, which has a "junk" rating of BB+.
Analysts and Wall Street traders say the market is largely driven by speculation: The swaps are mostly bought and sold by a small number of banks and hedge funds trying to profit from changes in the cost of the swaps themselves, rather than as actual protection against a default.
"No one is buying or selling this because they actually think the U.S. is really going to default on its debt and not pay it back," says Dave Klein, partner and co-founder of Capital Context, an independent research firm in Oakland, Calif. "This is not about an Armageddon scenario, but the risk that there are stresses in developed economies" like the U.S., he adds.
While trading activity has increased since late 2010, the net notional value of swaps on the U.S. remains incredibly small, at $4.77 billion, a far cry from the trillions of dollars in outstanding Treasury securities and much less than swaps outstanding on Germany and the U.K. And the market is extremely illiquid: During the week ended July 15, just 38 contracts were traded, covering a mere $683 million in debt, according to DTCC.
Many traders scoff at the idea of buying, or selling, these instruments. After all, if the world's largest economy defaulted on its debt, the global economic environment would be in such bad shape that it wouldn't be clear which counter-parties would be capable of making good on their pledges to pay holders of swap contracts.
Still, with the debt situation remaining fluid and unpredictable, some say they have been buying swaps on the U.S., expecting the cost of protection to rise if the nation's credit-worthiness deteriorates and its rating is downgraded, rather than in the expectation that they will get paid in an actual default.
The swaps "have done a very good job of discounting ratings moves," by rising in value ahead of recent warnings about the U.S.'s health by leading credit-rating companies, says Adam Fisher, chief investment officer of Commonwealth Opportunity Master Fund Ltd., a Los Angeles hedge fund that has bought the contracts over the past year.
"And if we do ever miss a payment or there's a downgrade, the returns would be pretty asymmetrical" in relation to the inexpensive price of this protection, he says.
Many traders say the prices of U.S. swaps aren't a reliable measure of default risk because there are so few trades. Analysts say most U.S. banks are reluctant to traffic in the swaps, to avoid the appearance of betting on the nation's collapse. Most trades are done with European banks, but they generally will take positions only if clients or other banks come to them wishing to buy or sell protection.
The result is that a small number of trades can cause price
bottom line is that you're onto something.
