[H8crilA]

That's not because of their credit risk but because they pay little to no coupon and get discounted through the interest rates. In particular imagine a treasury bond that will pay $100 in 10 years, you wouldn't pay $100 for that, would you? You'd instead put that $100 in a savings account (t-bills).

The true credit risk on US Treasuries is indeed an abstract and mysterious creature. Nobody knows what would such a "default" mean in practice, what paper would get paid up and what paper would not get paid. Would commercial bank deposits at the Fed get paid? And if not, then what does it even mean to "pay in dollars"? Like how do you achieve "paying someone X dollars", do you deliver printed currency?

[khuey]

Yes, they're trading well under par because they're very long duration bonds and interest rates have moved against them, not because of credit risk. What Levine points out in the linked piece is that per the terms of these CDSes if the US technically defaults you can use the CDS to accelerate repayment of these very long duration bonds and get par back immediately rather than having to wait 30 years to collect. There's little to do with credit risk per se and everything to do with the interaction of the CDS contract and the current low valuation of certain debt instruments.

[H8crilA]

OMG, you made me read his article, and only then realized how ludicrous the "cheapest-to-deliver option" is. I had no idea you can send the CDS issuer any bond! Of course this is just an option for the scenario of "the congress got into a massive fist-fight and couldn't press the `yes` button on their voting machines for three weeks straight". What a hilarious piece of financial engineering.

[khuey]

A reminder that "technical debt" doesn't just apply to software, I guess.

[quickthrowman]

> OMG, you made me read his article, and only then realized how ludicrous the "cheapest-to-deliver option" is.

It’s not really ludicrous, the US Treasury isn’t selling bonds of every duration every single day. You need some kind of framework to outline which Treasuries are acceptable to settle derivative contracts like futures/options/CDSes since Treasuries are not directly fungible like equity shares or commodities.

[Ekaros]

And also what part of finance is essentially gambling. "Hey I want to make this bet." "Sure we will sell it for this and it will pay out this..."

[jt2190]

This is only true for those who are not impacted, in this case, by a government shutdown.

For example, suppose you’re running a company that has won a government contract and you receive scheduled payments from them. You use the payments to pay your suppliers and employees. If you don’t pay your suppliers and employees on time it causes all kinds of problems.

If the government looks like they might delay their next payment to you, you can “buy insurance” so that you can still make the payments. Is this gambling? Maybe? But if you don’t gamble there are real consequences, so “not playing” is still “gambling”.

[almog]

> ... and get par back immediately rather than having to wait 30 years to collect

In a parallel universe the US has entered a short technical default just slightly before SVB's collapse, which allowed them (if CDS insured) to collect all MBS at par value.

[almog]

I'm guessing also that as the ex-date for a possible US default approaches (I think it hasn't been announced yet), the demand for older cheap bonds/notes would rise

[ac29]

> That's not because of their credit risk but because they pay little to no coupon and get discounted through the interest rates. In particular imagine a treasury bond that will pay $100 in 10 years, you wouldn't pay $100 for that, would you? You'd instead put that $100 in a savings account (t-bills).

Long treasuries (>1 year) are issued at very close to par and do pay coupons. A treasury that is trading at 50-something cents on the dollar has lost a lot of value (because it has a lower coupon rate than newer treasuries).

[khuey]

Yeah the particular one I was looking at was 912810SP4, a 30 year treasury with a 1.375% coupon. It was issued in August 2020 at a price of $99.24 for $100 of par, and it now trades just under $59.