National bankruptcy? Not yet
May 22nd, 2009By David Goldman
Bill Gross tumbled the Treasury markets yesterday by warnng that the US might lose it’s AAA rating. That means today is a good day to buy Treasuries. Bill Gross has been a contrarian indicator since Jan. 28, when he advocated buying risky securities, includink preferred. I’ve been watching the cost of credit protection for the US and the UK since the beginning of the year, noting in April how close we came to national bankruptcy. I wrote at the time, “Bill Gross is wrong again,” and the same applies today.
What I have argued since Jan. 23 is that the G7 sovereigns and the banks are joined together at the hip, thanks to the multi-trillion-dollar commitments that governments have made to the banks. S&P with its typical backward-looking sloth only got around to inspecting Britain’s barn door after the horses had been gone for months.
For the tenth time: The gauge to monitor is the cost of credit protection on the G7 sovereigns which Markit Partners reviews daily on a free site:
| Ticker | CLIP | Name | 5Y Today | Daily Chg (bp) | Weekly Chg (bp) | 28 Day Chg (bp) |
|---|---|---|---|---|---|---|
| USGB | 9A3AAA | Utd Sts Amer | 29 | -1 | 1 | -19 |
| JAPAN | 4B818G | Japan | 50 | 0 | 0 | -19 |
| DBR | 3AB549 | Fed Rep Germany | 30 | -2 | 2 | -13 |
| UKIN | 9A17DE | Utd Kdom Gt Britn & Nthn Irlnd | 72 | -1 | 5 | -27 |
| FRTR | 3I68EE | French Rep | 36 | 1 | 2 | -10 |
| ITALY | 4AB951 | Rep Italy | 84 | -3 | 3 | -32 |
The UK had been up at LIBOR +164, trading at banana-republic levels, and is now back down to manageable levels.
As the long deterioration of the economy continues, more cracks may appear in the facade of G7 credit, and it seems wise to start layering in hedges in a small way. But by and large, the sovereigns are doing very little because the banks are doing very little. The other failsafe indicator to watch is the risk of bank equities, i.e., the cost of options on bank stocks. Here’s Bank of America, one of the tippier ships in the fleet:
Implied Volatility on BAC Options Falls Faster Than Historical Volatility
BAC hedging costs are a third of their March peak.
It’s a time to pick hedges carefully (commodities, for example), not to run for the exits. Low vol means that no-one is running.
I note, by the way, that the UK banks regained the ground they lost yesterday, and that US banks are up in pre-market trading.
May 24th, 2009 at 4:51 am
No need for bankrupcy, when debts are denominated in dollars. Just print, print, print. And as for agencies. Arent these the same which just some time ago rated junk as triple A securities? Perhaps, someone should rate them too. But who cares about the ratings after all. Market is making decisions every day even without them. Just take a look at currencies or willingness of foreigners to buy government bonds. Ona cannot fool the market forever. Truth will show up, sooner or later.