[ViagraPriceBuying]

Yet at the same time the yield on Treasuries is ridiculously low...

[frkksptn]

Originally posted by KrazyHorse
Yet at the same time the yield on Treasuries is ridiculously low... The yield being low says more about the relative risk of the alternatives though, right?

[Madjostok]

If only they had a CDSDS?

(OMG... lets go into business!!!!)

[Shemker394]

Originally posted by snoopy369
Somehow I think this says more about the risks of CDS than of Treasuries... If the price of a CDS goes up it is because the risk to the issuing party has increased. This risk comes in two forms: the risk that the underlying will go into default and the counterparty risk that you won't be paid your spread. Since the spread is generally payable in advance, this risk is minimal compared to the counterparty risk on the other side (where in the case of an underlying default your counterparty risk is on the whole notional amount). One would think that an increased expectation of counterparty risk on CDS would DECREASE their price, given a constant risk of default on the underlying.

[Rufio]

Originally posted by Aeson
If only they had a CDSDS?

(OMG... lets go into business!!!!) They do, basically. Just buy a CDS on the debt of your counterparty.

[RenyBontes]

Isn't the risk increased because they are in higher demand?

[mitiaycatq]

That's no fun. It needs a new name and structure (ideally hidden among thousands of pages of documentation) to be sufficiently obtuse for my ends....

[Kokomoxcvcv]

Originally posted by KrazyHorse
That's not what he said. He said "the risks of CDS", which lies in counterparty risk. As I demonstrated in the post above an increase in counterparty risk in the CDS market would, ceteris parebus, drive CDS prices down. I was asking you based on your A,B post. Sorry if that edit was confusing. Just meant you somewhat answered the question with the second post that slipped in there before mine, but I wasn't clear on what you were getting at still.

[jisee]

Originally posted by KrazyHorse


What risk? I view these as a type of insurance. Investors in US Treasuries are insuring their investment. Insurance doesn't pay in a catastrophic event though. If everyone is insuring their investments and the govt defaults these derivatives are worthless, no?

[Borzopayn]

Originally posted by Kuciwalker
taken as risk-free by definition. ???

[emuffette]

Originally posted by KrazyHorse
??? I thought that was the underlying assumption of any financial analysis involving Treasuries. If the US govt defaults then everyone else is so royally ****ed you can't expect anything to hold.

I have the same deal as you and Aeson with these hedges.

[toyboy]

Originally posted by Kuciwalker


I thought that was the underlying assumption of any financial analysis involving Treasuries. It's the simplest underlying risk assumption you can make, and since the risk is generally pretty low it's a good one, most of the time. It's not the only thing you can do.

[NaMbessemab]

Originally posted by Comrade Snuggles
However bad inflation might be, it would still be better than a default This is not necessarily true, though for most values of inflation it probably is true.

[CreativeAcrobate]

Originally posted by Kidicious
These hedge against a price fall as well as a default don't they? What do, CDS? They hedge against price falls of bonds due to default risk factors. They are an imperfect hedge against bond prices because there are other considerations in the prices of bonds (interest rate risk).

[Marat]

Ok, that answers my question as to why they still buy them for US treasuries. (If it only payed out in default, then it wouldn't make sense. But if it's just a hedge against a drop in value it does.)

[Immusaatmonna]

Originally posted by Aeson
Ok, that answers my question as to why they still buy them for US treasuries. (If it only payed out in default) It does only pay out in default.

My point in saying that it is an (imperfect) hedge against bond price movements is the CDS as a contract has value associated with it (assuming that you think there is at least SOME chance it will pay out in case of default!). Insofar as the price of a bond drops due to a perceived increase in the risk of its default the CDS will hedge against price movements (since the value of a CDS goes up as the chance of default increases).

[eFDMBwKH]

This looks like another case of the more people buy of these the higher the price goes and the more worthless they become.

[parishilton]

Ah, ok.

So in this case, the risk of a default on the CDS in the event of a US default is mitigating the price increase of the CDS due to the risk that the US could default?

Essentially the risk of the US defaulting is both increasing (directly) and decreasing (indirectly, but < 100% effect) the value of the CDS?

:boggle:

[rNr5Di3S]

Originally posted by KrazyHorse
P{D} increasing does not necessarily change P{C|D}, though it might (if, for instance, demand for Treas CDS increases to the point where companies who write Treas CDS are at increased default risk if Treas defaults). In my "essentially" I was referring to this "might", or at least in part. This "might" is risk to whatever extent, and would have a downward influence on price to the extent of the risk.

Though there's more to it, just not sure how to describe what I'm thinking. If you look at the "given" of US default, it's a factor (yes, a given... but still a factor) in C. C being a negative influence on price. If that explanation doesn't make sense, I understand... it doesn't make much sense to me either.

Neither does the whole deal... I personally would be writing as much CDS on US Treasuries as I possibly could if only I could fool people into thinking I could possible back it... at least that is if I didn't have a soul or conscience or whatever you want to call it. My thesis would be that if the US Gov can default, so can I. But until then... let the good times roll!

[Goooooblin]

Originally posted by Kuciwalker
"more worthless" is an interesting concept English is not a logically constructed language. "More worthless" is a common enough phrase.