whidbey

Treasury Anomalies: Disruptions in the Relationship between Swaps and Bonds

Your pondering is useful, but it hardly reaches the issue of the CDS in general which present not just spill over problems in hedging, but fundamental risks of their own since most are not secured by very much in relation to the risk they cover and many of the counter-parties have suffered huge losses. If we see the insured corporation paper and bonds get into difficulty (and here will be a number in the high yield area), it will make the credit crunch look like a picnic. Most swaps are sold naked and most sellers utterly unable to response in settlement. Then maybe the world comes unglued since there are 50-70 trillion dollars worth out there, some where, nearby, too close for comfort.