The Bond Vigilantes Are Here: US Net Notional CDS Outstanding Surpasses Greece For The First Time

Tyler Durden's picture

While the CDS market for various insolvent European names whose credit default swaps are trading 10 or more points upfront has become more or less nothing but noise, and the only true way to hedge risk exposure, courtesy of ISDA's advance warning that no matter what a CDS will never be triggered, is to sell cash bonds, the market for default risk is quite active for those names which still trade in a reasonable range: such as between 50 bps and 200 bps. And while the Bloomberg chart below demonstrates on an absolute basis the US is due for a two notch downgrade by S&P based on the recently observed spike in US default risk, it is DTCC data that is more troubling.

As the first chart below shows, of the Top 25 CDS outstanding net notional names tracked by DTCC, there is one name that is a big outlier on both a month over month and year over year basis: the United States of America. The first thing to note is that in the past week, US net notional CDS outstanding just hit $4.8 billion, an increase from $4.5 billion in the past month, a 5.4% increase (the biggest over all top 25 names), pushing the net risk on the US above that of Greece for the first time (Greece declined from $5 billion to $4.6 billion). More disturbing is that on a percentage basis, the year over year change in US net CDS outstanding is the biggest of all, more than doubling at 108.6%, followed only by China and Japan, at 96.7% and 80.9% respectively. Yes: the CDS itself has not blown out yet, but the stealthy increase in the net notional in the troika of "most stable countries" means that the smart money is already quietly positioning itself for the biggest and most significant blow out ever. It also means that the spreads of such countries of Greece and Portugal (a major drop in net notional M/M and Y/Y) not to mention Italy, are yesterday's news. As most revel in the latest nonsensical Group of 6 plan, the bond vigilantes are already quietly setting the trap.

Below is the biggest percentage change in net CDS notional on a monthly and annual basis:

And here is Bloomberg's take on where the US rating should be based on its CDS spread:

A Bloomberg Brief CDS implied credit rating model, which compares composite credit ratings against the cost of CDS, shows that investors may be expecting a downgrade to as low as ‘AA’ for the U.S. The world’s largest economy has already been placed on credit watch by both Moody’s and S&P. The cost of protecting against a U.S. default rose to 54.4 basis points yesterday from less than 40 in April.

The composite credit rating — on the y-axis — is calculated by quantifying the three primary ratings agencies’ (S&P, Moody’s, and Fitch) ratings, where available, and averaging the results. A score of one indicates the highest rating ‘AAA’; a score of 10 or better indicates that a country is investment-grade. The cost of fiveyear CDS — on the x-axis — is the amount traders are willing to pay to protect against a debt default.

The current implied credit rating for the U.S. is 2.7, compared to 2.2 back in March, equivalent to approximate ly ‘AA’ on S&P’s scale. That is two levels below the U.S.’s current rating. March was the last time Bloomberg Brief looked at these implied credit ratings. At that time, the three most likely candidates to be downgraded were Portugal, Belgium and Spain.

Both Portugal and Spain have been downgraded. Spain is also the most likely candidate for a downgrade at present, with a composite rating of 2.7 versus a CDS implied rating of 9.1, equivalent to ‘BBB’ on S&P’s rating scale.

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jkruffin's picture

Well, it is about time!!!!!!! It took em' long enough. Time to put Bernanke out of business....

Dr. Engali's picture

Not yet I don't have enough gold.

narnia's picture

bond vigilantes are bringing a knife to a gun fight with the Fed if they think they will be driving yields or collecting on a CDS.  the Fed is not going to let bond auctions fail (and are prepared to be the only buyer left standing) & the Treasury is not going to allow a default.    

baby_BLYTHE's picture

the primary dealer relationship with the FED virtually guarantees there will never be a 'failed' auction.

We can see the trend> Raise Debt Ceiling + Calculate the CPI more fraudulently + Print more money

The US government will inflate its way out. Very high inflation rates are in our immediate future

Blithering ORSA's picture

Commoditize, ma'am. The currency will be used as a safety valve.  The lost value has to go somewhere.  I'd prefer silver to gold for the nonce.  The ratio of Au/Ag has gotten fairly rediculus lately.

unununium's picture

> Very high inflation rates are in our immediate future

You do realize that also kills the 30-yr.

baby_BLYTHE's picture

in real terms, inflation isalready  well above the yield on the 30-yr

narnia's picture

the 30 year, or any other security for that matter, gets killed when it has no bidders.  my guess is, the Fed will let yields go up marginally in line with their bogus inflation numbers & bid the crap (directly or indirectly) out of any movements above their centrally planned boundaries.

whatever is left of the US private sector & our debtors will not be able to shoulder the consequences of this game indefinitely. 


whatsinaname's picture

Honestly, I dont have faith in these so-called vigilantes. The term "vigilantes" is so 80s...

Zero Debt's picture

The bond vigilantes are here! We are saved!

Flore's picture

But but.. if the casino goes bust.. what are your chips worth then ?

Oh regional Indian's picture

The potatoes and oil + energy input in terms of heat that was put in. Plus a small margin for labour perhaps?



falak pema's picture

hey Ori, I have had my book published. Here its is. 

On the 33rd...

So when do you publish yours?

cossack55's picture

Why is it I trust justice from a vigilante more than from the US justice system?

the not so mighty maximiza's picture

scary isn't it , thinking such thoughts.

oogs66's picture

still scary that the best financial articles now come from rolling stone magazine....

Cognitive Dissonance's picture

Up is down, left and right, good is bad, debt is money. Welcome to the rabbit hole. Alice will be by later with drinks and some finger food.

BYOD  (bring your own debt)

Arius's picture

Party on ... Biatchez !

welcome to the Chinese rule ....

Cognitive Dissonance's picture

I welcome my Asian overlords. It's about time we got some real Chinese food around here instead of this MSG crap.  

I also welcome my stealth serial junker back after a few well deserved days off. Thanks for all you do. :>)

trav7777's picture

I've got at least 2 of those...I can post the weather forecast and get junked!

monopoly's picture

This is taking time but no surprises for us.

Cdad's picture

Again, why was the 30 year bid up yesterday?  The plan being contemplated by the weak-kneed Senate will NOT be good for treasuries.

Cognitive Dissonance's picture

Brother Cdad,

I have decide to finally surrender to the wonderful embrace of the collective insanity. Please join me later this afternoon by the pool for drinks. It will be gloriously refreshing.

Make sure to wear your Panama banana republic hat. I'll be wearing my Bermuda financial scam shorts and a very loud Hawaiian shirt. Bernanke has promised to make an appreance and welcome us to the fraud machine. Please don't embarrass me by forgetting to kiss his ring.

Brother CD

Cdad's picture

Understood, brother Cog,

I'll be the really, really drunk guy who forgot his swimsuit and jumps in the pool fully clothed.

Cognitive Dissonance's picture


Just don't forget to kiss the ring. We don't want to blow our initiation. And make sure to bring your own K-Y. No sharing at this club. Either you BYOK-Y or you go dry.

Commander Cody's picture

And where is Greece?

Sudden Debt's picture

Tyler, how come China is so high up?

Dr. Engali's picture

Because they are fucked too. It's a global economy. We all grow together and we all collapse together.

Urban Roman's picture

Soon to be Hellenic Handbasket

Commander Cody's picture

Cute.  I presume they are off the chart.

FastBoat's picture

Recolonized as Southern Germany.  They needed a Mediteranean coast.

americanspirit's picture

They think they're gliding down the highway

But in fact they're slip-sliding away

Oh regional Indian's picture

Ahhhha! Awesome americanspirit!


Tucson Tom's picture
We're workin' our jobs, collect our pay
Believe we're gliding down the highway, when in fact we're slip sliding away .How prophetic!

Atomizer's picture


azzhatter's picture

Hey, we ain't Pakistan

Cole Younger's picture

Pakistan is not Greece. Greece is not Italy. Italy is not Spain. Spain is not Ireland. Ireland is not Portugal. Portugal is not Belgium. Dollars are not Gold.

ZackAttack's picture

I wonder if these CDSs pay off in dollars. What beautiful irony to have been positioned correctly, only to be paid off in scrip rendered worthless by the very event you were insuring against.

Tyler Durden's picture

US CDS are € denominated. Precisely for that reason

Cole Younger's picture

Interesting. What happens if the EURO collapses before the Dollar? 

trav7777's picture

then they will pay a really huge amount of euros

Non Passaran's picture

Who cares? You'd just get more of them.

ZeroPower's picture

Or Quanto if one feels like paying a special price to the MM

Smiddywesson's picture

Equally worthless fiat.  The death of a $13 trillion economy and the reserve currency, will leave a big hole in space, sucking in all other large economies, especially China and the EU.

malikai's picture

I think I'd rather have gold denominated CDS. It is hard to believe that if there was a US default, that the euro would be unaffected. Maybe the price would be more realistic as well, since anyone seriously thinking about a default in the US should probably be thinking about gold anyway. Maybe that will be the CDS of the future.

Non Passaran's picture

What makes you think you'd actually get paid in gold?

Besides, I don't see how the currency matters here as long as it's a major one - whatever you get paid in the euros you'd be able to convert to gold.