Gold New Record Nominal Highs ($1,625.70) As CDS Traders Start Positioning For U.S. Downgrade(s)
by Tyler Durden
Economists in the U.S. believe that the U.S. will lose its vanguard AAA credit rating according to a recent poll conducted by Reuters. A survey of 53 economists showed 30 believed that one of the three leading credit rating agencies will downgrade US debt. The economists do not believe that the U.S. will default.
A downgrading of the U.S. is inevitable given its very poor fiscal position – the question is by how much the U.S. is downgraded and AA looks possible in the coming months.
The widening in U.S. CDS has so far been modest but the bond vigilantes may be awakening from their slumber as net notional CDS on US debt has risen above that of Greece and Italy.
Financial players have positioned themselves by buying some $4.8 billion of credit default swaps on U.S. government debt, according to figures from the Depository Trust and Clearing Corporation.
They either believe that the U.S. government will default on its debt or are taking out insurance against of this happening.
Investors internationally — including everyone from individual consumers in their pension funds, to hedge funds, to the Chinese government — currently hold $9.3 trillion (with a T!) in Treasury bonds, and they’re counting on Uncle Sam paying up when those contracts mature.
The U.S. government will have a three-business-day grace period to make good on any default before credit default swaps are triggered, the International Swaps and Derivatives Association said Tuesday.
ISDA General Counsel David Green, in a Bloomberg TV interview Tuesday, said that ratings agency actions on U.S. debt and CDS triggers are completely unrelated. “If the ratings agencies come and say there’s a default or there’s downgrade…that doesn’t itself trigger CDS. We would look at whether a payment is due and whether it was made or not.”