Wednesday, November 26, 2008

We're getting punked by the Finns and the Weegies?

( I beg to differ with the UniCredit 'credit strategist' increasing spreads reflect an expectation of selective default due to the enormous cost. Why is it that when CDS on private risk go up folks report that the cost of insuring against default increased as opposed to the narrative that 'the cost of hedging against losses' increased? - AM)


By Michael Shanahan and Abigail Moses
Nov. 26 (Bloomberg) -- The cost of hedging against losses on U.S. Treasuries surged to an all-time high after the Federal Reserve’s new $800 billion effort to combat the financial crisis raised concern about how the ballooning debt will be funded.
Benchmark 10-year credit-default swaps on U.S. government bonds jumped six basis points to 56, according to CMA Datavision prices at 12:20 p.m. in London. The contracts have risen from below two basis points at the start of the credit crisis in July 2007.
“There is a lot more money to be spent and it is not clear how it is going to be financed,” said Tim Brunne, a Munich-based credit strategist at UniCredit SpA. “Credit spreads don’t reflect expectation of default, just the uncertainty over the enormous cost to the government.”
The Fed’s new plan to kick-start markets for loans to students, car buyers, credit-card borrowers and small businesses means it will be taking on credit risk by buying debt. The central bank pledged to purchase as much as $500 billion in mortgage-backed securities as well as up to $100 billion in direct debt of Fannie Mae and Freddie Mac, the world’s two largest mortgage buyers, and Federal Home Loan Banks.
“They are loading their balance sheet with credit risk,” Brunne said in a phone interview. “Where does all the money come from?”
Five-Year Contracts
The cost of five-year contracts on Treasuries rose 3 basis points to 50.5, after earlier trading as high as 52, CMA prices show. That’s higher than the debt of Finland, Germany and Norway, according to data compiled by Bloomberg.

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