random2348

Shorting U.S. Government Risk

Let me stress that I believe that it is very unlikely that the U.S. will ever default on its debt (maybe "default" is too strong of a word - yes, the U.S. can always print more dollars - let's say "restructure" instead - and by "restructure" I mean changing the terms of its obligations in a way that is akin to default, not merely adjusting the mix of bills, notes, and bonds). Until recently, the conventional wisdom was that for the U.S. to have to restructure its debt would be basically impossible - even now, if someone asks you for "risk-free rates," you're probably going to look up Treasury yields. Well, maybe a future debt crisis that results in a restructuring is not impossible, but just very unlikely. Note that foreign governments would bear much (but not all) of the pain of a restructuring.

Shorting U.S. Government Risk

dkp,

OK - bad example. How about this one, then? en.wikipedia.org/wiki/...

"Russia's ruble-denominated debt would be restructured in a manner to be announced at a later date"

Shorting U.S. Government Risk

apppro,

If confidence returns to the stock market and the credit markets, then Treasuries are likely to sell off. To some degree, shorting Treasuries is a bet that financial markets will normalize and risk aversion will decline. But it is also bet that stands to gain if the U.S. government issues such a massive amount of debt in order to finance the bailouts that the new supply of Treasuries overwhelms the flight-to-safety demand.

Shorting U.S. Government Risk

dkp,

Note that credit default swaps on Treasuries are quoted in Euros. See

www.bloomberg.com/apps...

It is not necessarily the case that one's counterparty has failed when the U.S. has failed. In particular, a counterparty not based in the U.S. might not have failed at the time of a U.S. government debt crisis.

Credit default swaps on Iceland's debt - also snake oil? They can always print more krona to repay their debts, right?

The CDS market is saying that the probability of the U.S. defaulting on its debt is very small but non-zero.