More Investors Position for Possibility of U.S. Default

[lektrode]

orig noted in print from wsj.com (its behind the paywall, but since i decided to re-deploy my online media budget to itulip, no can get from them, so here is from:
http://totalinvestor.blogspot.com/20...ssibility.html

is this perhaps an early warning indicator?
More Investors Position for Possibility of U.S. Default


The net notional amount of derivatives used to hedge or speculate against a default on U.S. government debt rose 12% in late January, according to Depository Trust & Clearing Corp. figures.
The increase suggests investors are becoming more nervous about the quality of U.S. debt. It also threatens to cast a pall over the notion that Treasuries are risk-free assets investors should run to for haven from other instruments.
The net notional of credit default swaps bought and sold on U.S. debt rose from $2.67 billion to just over $3 billion between Jan. 14 and Jan. 21, according to DTCC data updated Tuesday. The gross notional rose from $16.1 billion to $17.2 billion, or 6.8%.
When it comes to credit default swaps—more commonly known as CDS—gross notional refers to the amount of protection bought or sold in the aggregate. Net notional values are a more precise reflection of the amount of money that would change hands between net sellers of CDS protection and net buyers in a default.
Meanwhile, the cost of CDS on U.S. debt has risen 25% over the past month, to around 0.50 percentage point from 0.40 percentage point in early January, according to data provider Markit. A price of 0.50 percentage point translates to €50,000 (about $70,000) a year to insure €10 million of U.S. sovereign debt for five years, meaning the cost has risen by €10,000 a year over that period.

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and how about this:

By John Spence
Published February 05, 2011
| MarketWatch Pulse
http://www.marketwatch.com/story/fan...day-2011-02-05

BOSTON -- Shares of (FNMA 0.68, -0.11, -14.26%) and Freddie Mac /quotes/comstock/11k!fmcc (FMCC 0.73, -0.11, -13.21%) fell sharply fell sharply late Friday afternoon after CNBC reported the Treasury Department is set to announce an overhaul of the mortgage giants that were placed into government conservatorship in the credit crisis. The revamp will call for a significant reduction of their share of the U.S. mortgage market, and an increase in the cost of government-backed mortgage insurance, CNBC reported. The Treasury plan will back a reduction of the government's share of the mortgage market to below 50% from the current 95%, CNBC said. Shares of Fannie Mae and Freddie Mac closed Friday down more than 13%.


is this a positive development (in getting the RE market to clear at some point)
or just more can-kickin?

[BuckarooBanzai]

Re: More Investors Position for Possibility of U.S. Default

My goodness. OF COURSE the US Gov't is going to default; they already did twice in the 20th century (1933 and 1971). It's amazing they've managed to keep it from happening the third time as long as they have.

[BigBagel]

Re: More Investors Position for Possibility of U.S. Default

Will someone please explain how it's possible for the US Government to default. The principal on your bonds will be repaid and the interest payments will be made. How can anyone doubt that? I think in time the money used to make the payments won't be worth much but the only way they'll default will be if the bonds are not denominated in dollars. Is the end result the same? Pretty much but what good is CDS protection when the payments are made as guaranteed?

Fannie/Freddie: Reducing the government share of home financing to 50% from 95% ain't happening any time soon. Mortgage rates will shoot up and real estate prices will decline further. We can't have that.

[c1ue]

Re: More Investors Position for Possibility of U.S. Default

A literal default is extremely unlikely - the US government would have to choose to not print money.

An effective default via high/hyper inflation on the other hand...

[jtabeb]

Re: More Investors Position for Possibility of U.S. Default

Think default via devaluation, NOT failure to explicitly pay. It will pay, just in currency that is worth less and less.

[jpatter666]

Re: More Investors Position for Possibility of U.S. Default

Think default via devaluation, NOT failure to explicitly pay. It will pay, just in currency that is worth less and less.

Exactly. At this point it's nigh impossible for any other outcome. I think will see a massive inflationary move across the globe as everyone is drowning in debt. The only question in my mind is whether the dollar (aka best horse in the glue factory) will see temporary strengthening moves that might make it worth holding onto to for brief periods.

[BigBagel]

Re: More Investors Position for Possibility of U.S. Default

Think default via devaluation, NOT failure to explicitly pay. It will pay, just in currency that is worth less and less.

Agreed, so what good are buying credit default swaps on Treasury debt? That's what I don't get.

[jtabeb]

Re: More Investors Position for Possibility of U.S. Default

Agreed, so what good are buying credit default swaps on Treasury debt? That's what I don't get.

You get it perfectly, this is a bet that has little to no chance of paying out. (Hey, people don't listen to facts and ignore reality, that's the only thing I can say).

The only CDS that pays out in the event of dollar devaluation is Gold. People should know that by now.