Investor Bet 850 MIL the US would get downgraded

[erinl]

Woah, you guys see / hear about this?

This was an article from 7/26/2011

http://www.nuwireinvestor.com/articles/mammoth-investor-bets-against-us-57548.aspx


Mammoth Investor Bets Against US

Tuesday, July 26, 2011

Written by:
Jack Barnes



An $850 million trade in the futures market Thursday has redefined every investor’s perception of the ability of the U.S. to avoid default. The trade, which signifies a bet made with actual capital, will only turn a profit if the U.S. loses its AAA credit rating, which will occur if it goes into default. The wager is so large that analysts believe it would not have been made unless the trader believed with near absolute certainty in the outcome, which could only happen with insider information. The conclusion is that a deal has been made in Washington and news has leaked, and someone with a great deal of capital has found out. It is a very short list of investors that includes John Paulson, PIMCO and either the U.S. or Chinese central banks. The news has galvanized the market and traders are already responding with less confidence in the dollar. For more on this continue reading the following article from Money Morning.
Someone dropped a borab on the bond market Thursday - a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.

In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.

The massive trade wasn't placed in bonRAB themselves; it was placed in the futures market.

The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.

The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.

However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.

You only do this if you see an edge.

This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up.

I believe what happened is a debt-ceiling deal was done in Washington and leaked to a major proprietary trader. Everyone knows the debt negotiations in Washington have been an extreme game of brinksmanship between political parties, but now someone knows how that game played out.

This had the hallmarks of one of the largest bond shops in the world knowing something the rest of the market didn't.

The nuraber of shops or even central banks that can take on this level of market risk is extremely small. Some that come to mind are hedge fund manager John Paulson, Bill Gross's PIMCO, and the U.S. and Chinese central banks.

Paulson already scored big - about $6 billion big - on a similar trade years ago when he bet against subprime mortgages, the investments that helped bring down Lehman Bros. and many other investors.

Whoever was behind it wanted a trade on ASAP, and didn't care about the ripples they would cause.



You can see how this trade caused fear to be unleashed in the market once it got out and the implications hit by looking at U.S. Treasuries. People who were long 30-year Treasuries panicked as they saw the huge short put on the futures market, and started to unwind their long exposure.

What you, as investors, should do now is look at the bond exchange-traded funRAB (ETFs) that provide a positive rate of return when U.S. Treasuries drop in value. YielRAB are going up sooner rather than later, if the person behind this Armageddon trade is correct.

This article was republished with permission from Money Morning.

[hyp44]

someone explain how a trade like that can return 1000%. it's only possible trading futures??

[ivwillrockyou]

obviously the biggest traders in the world like john paulson and bill gross know stuff that us peasants dont know. they have the knowledge and the capital to speculate on events like this.

[Tony Le]

It could be covering a short as well. There is a lot more too this, most of which I don't understand.

[gatorbite3210]

That was me.

[Blessed!!]

I need to learn more about derivatives and other exotic financial instruments

[latinagrl_88]

there's a derivative against everything
why is this surprising?

[metsgiantsfan333]

It's a bet that the treasury bond's interest rate will be at a certain rate at a certain time. The bet, if incorrect, can expire worthless. If it goes the correct way, it can become worth the actual value instead of the much reduced rate it is purchased at when it is in a position to expire worthless.

[randomtoad]

god damn

either inside info or GIGANTIC balls

[Anabell M]

What a baller