David Goldman w/an interesting thought. First he correctly calls out the Germans for making a bad situation worse by banning naked CDS, since banks are forced to use these to hedge their sovereign exposure. If they can't use them, they have no choice but to reduce their position. Second, he says that once LIBOR hits 0.75%, it no longer makes sense for banks to own 2 year tbills (this is the favorite part of the curve for banks playing the carry trade). This would spell serious trouble for the US bond market.
http://blog.atimes.net/?p=1481
unless LIBOR hits 75 bps, in which case head for the shelter
May 24th, 2010
By David Goldman
Who knows what evil lurks in the hearts of men, said the Shadow of 1930s radio fame, and who knows what garbage lurks in bank portfolios? If Greece and one or two other of the PIIGS were to reorganize some European banks would fail. The interbank market has seized up. This is badly exacerbated, to be sure, by the idiotic decision of the German government last Tuesday to ban credit default swap trading in European sovereigns. What that means, according to industry sources, is that all the German banks are frozen with the positions they held a week ago. Their position resembles that of the Bismarck after its rudder was disabled in the great World War II sea battle.
It happens that banks hedge their country exposure with credit default swapsâtheir own regulators make them do it. If banks canât use credit default swaps to lay off sovereign risk, they will reduce positions.
If LIBOR continues to creep up and reaches, say, 75 bps, it no longer will be economical for banks to own US 2-year notes. In that case the US Treasury market will be in trouble. Thatâs when you head for the bomb shelter.
http://blog.atimes.net/?p=1481
unless LIBOR hits 75 bps, in which case head for the shelter
May 24th, 2010
By David Goldman
Who knows what evil lurks in the hearts of men, said the Shadow of 1930s radio fame, and who knows what garbage lurks in bank portfolios? If Greece and one or two other of the PIIGS were to reorganize some European banks would fail. The interbank market has seized up. This is badly exacerbated, to be sure, by the idiotic decision of the German government last Tuesday to ban credit default swap trading in European sovereigns. What that means, according to industry sources, is that all the German banks are frozen with the positions they held a week ago. Their position resembles that of the Bismarck after its rudder was disabled in the great World War II sea battle.
It happens that banks hedge their country exposure with credit default swapsâtheir own regulators make them do it. If banks canât use credit default swaps to lay off sovereign risk, they will reduce positions.
If LIBOR continues to creep up and reaches, say, 75 bps, it no longer will be economical for banks to own US 2-year notes. In that case the US Treasury market will be in trouble. Thatâs when you head for the bomb shelter.