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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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Wed, 07/20/2011 - 09:20 | 1473364 jkruffin
jkruffin's picture

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

Wed, 07/20/2011 - 09:34 | 1473422 Dr. Engali
Dr. Engali's picture

Not yet I don't have enough gold.

Wed, 07/20/2011 - 10:47 | 1473646 narnia
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.    

Wed, 07/20/2011 - 11:00 | 1473720 baby_BLYTHE
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

Wed, 07/20/2011 - 11:04 | 1473736 Blithering ORSA
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.

Wed, 07/20/2011 - 11:39 | 1473901 unununium
unununium's picture

> Very high inflation rates are in our immediate future

You do realize that also kills the 30-yr.

Wed, 07/20/2011 - 11:45 | 1473934 baby_BLYTHE
baby_BLYTHE's picture

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

Wed, 07/20/2011 - 14:33 | 1474566 narnia
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. 


Wed, 07/20/2011 - 10:50 | 1473659 whatsinaname
whatsinaname's picture

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

Wed, 07/20/2011 - 11:43 | 1473930 Zero Debt
Zero Debt's picture

The bond vigilantes are here! We are saved!

Wed, 07/20/2011 - 09:21 | 1473368 Flore
Flore's picture

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

Wed, 07/20/2011 - 09:33 | 1473415 Oh regional Indian
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?



Wed, 07/20/2011 - 10:26 | 1473568 falak pema
falak pema's picture

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

On the 33rd...

So when do you publish yours?

Wed, 07/20/2011 - 09:21 | 1473369 cossack55
cossack55's picture

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

Wed, 07/20/2011 - 09:24 | 1473381 the not so migh...
the not so mighty maximiza's picture

scary isn't it , thinking such thoughts.

Wed, 07/20/2011 - 09:33 | 1473416 oogs66
oogs66's picture

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

Wed, 07/20/2011 - 09:37 | 1473426 Cognitive Dissonance
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)

Wed, 07/20/2011 - 10:10 | 1473517 Arius
Arius's picture

Party on ... Biatchez !

welcome to the Chinese rule ....

Wed, 07/20/2011 - 10:20 | 1473537 Cognitive Dissonance
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. :>)

Wed, 07/20/2011 - 10:50 | 1473662 trav7777
trav7777's picture

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

Wed, 07/20/2011 - 09:22 | 1473370 monopoly
monopoly's picture

This is taking time but no surprises for us.

Wed, 07/20/2011 - 09:23 | 1473374 Cdad
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.

Wed, 07/20/2011 - 09:33 | 1473411 Cognitive Dissonance
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

Wed, 07/20/2011 - 09:37 | 1473427 Cdad
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.

Wed, 07/20/2011 - 09:46 | 1473445 Cognitive Dissonance
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.

Wed, 07/20/2011 - 09:23 | 1473376 Commander Cody
Commander Cody's picture

And where is Greece?

Wed, 07/20/2011 - 09:27 | 1473392 Tyler Durden
Tyler Durden's picture

Hellenic Republic

Wed, 07/20/2011 - 09:47 | 1473448 Sudden Debt
Sudden Debt's picture

Tyler, how come China is so high up?

Wed, 07/20/2011 - 09:52 | 1473457 Dr. Engali
Dr. Engali's picture

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

Wed, 07/20/2011 - 10:17 | 1473542 Urban Roman
Urban Roman's picture

Soon to be Hellenic Handbasket

Wed, 07/20/2011 - 11:47 | 1473951 Commander Cody
Commander Cody's picture

Cute.  I presume they are off the chart.

Wed, 07/20/2011 - 09:28 | 1473395 FastBoat
FastBoat's picture

Recolonized as Southern Germany.  They needed a Mediteranean coast.

Wed, 07/20/2011 - 10:22 | 1473563 kaiserhoff
kaiserhoff's picture

It's a Humpty-Dumpty thang.

Wed, 07/20/2011 - 09:23 | 1473377 americanspirit
americanspirit's picture

They think they're gliding down the highway

But in fact they're slip-sliding away

Wed, 07/20/2011 - 09:33 | 1473418 Oh regional Indian
Oh regional Indian's picture

Ahhhha! Awesome americanspirit!


Wed, 07/20/2011 - 09:47 | 1473447 Tucson Tom
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!

Wed, 07/20/2011 - 09:25 | 1473382 Atomizer
Atomizer's picture


Wed, 07/20/2011 - 09:27 | 1473389 azzhatter
azzhatter's picture

Hey, we ain't Pakistan

Wed, 07/20/2011 - 09:38 | 1473428 Cole Younger
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.

Wed, 07/20/2011 - 09:28 | 1473393 ZackAttack
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.

Wed, 07/20/2011 - 09:31 | 1473403 Tyler Durden
Tyler Durden's picture

US CDS are € denominated. Precisely for that reason

Wed, 07/20/2011 - 09:44 | 1473443 Cole Younger
Cole Younger's picture

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

Wed, 07/20/2011 - 10:55 | 1473684 trav7777
trav7777's picture

then they will pay a really huge amount of euros

Wed, 07/20/2011 - 10:58 | 1473697 Non Passaran
Non Passaran's picture

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

Wed, 07/20/2011 - 19:44 | 1475625 StychoKiller
StychoKiller's picture

Quatloos FTW!!

Wed, 07/20/2011 - 09:46 | 1473444 ZeroPower
ZeroPower's picture

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

Wed, 07/20/2011 - 09:49 | 1473453 Smiddywesson
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.

Wed, 07/20/2011 - 09:54 | 1473473 malikai
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.

Wed, 07/20/2011 - 11:01 | 1473726 Non Passaran
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.

Wed, 07/20/2011 - 14:16 | 1474519 malikai
malikai's picture

What if said default means the price of gold is suddenly $10^16? And yea, it's highly unlikely you'd get paid if it was the US defaulting, especially if the price is that.

Wed, 07/20/2011 - 11:07 | 1473753 doggings
doggings's picture

Janet Tavakoli was saying the endgame is CDS settled in Gold a little while back

Wed, 07/20/2011 - 09:28 | 1473394 ZeroPower
ZeroPower's picture

Current environment of increasing demand for safety (i.e. USTs) means an equal demand for protection; CDSs. 

FRA, GER, ITA, TURK all have way more net notional. Perhaps the bond vigilantes were just a bit too early over there.

Wed, 07/20/2011 - 09:28 | 1473396 Bartanist
Bartanist's picture

Who was that masked man?

Wed, 07/20/2011 - 09:30 | 1473399 Johnny Lawrence
Johnny Lawrence's picture

Vigilantes seem to be on gold & silver this morning.

Wed, 07/20/2011 - 09:31 | 1473405 Tense INDIAN
Tense INDIAN's picture

I say HELLO   to the BOND VIGILANTES .....bring it ON...........and heres my NIFTY update ::::

Wed, 07/20/2011 - 10:25 | 1473571 Thisson
Thisson's picture

I'm junking you for having shitty fiat dollar wallpaper on your blog.

Wed, 07/20/2011 - 09:32 | 1473410 Oh regional Indian
Oh regional Indian's picture

That headline read like The Four Riders of the Apocalypse are upon us!!!



Wed, 07/20/2011 - 09:33 | 1473414 Iam_Silverman
Iam_Silverman's picture

"The current implied credit rating for the U.S. is 2.7, "

"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,"

Wow.  The mixing of two terms in the same paragraph slipped by me at first, and for a second I thought that I was reading that the credit rating for the U.S. was equivalent to that of Spain!

That's scary.

Wed, 07/20/2011 - 09:36 | 1473419 virgilcaine
virgilcaine's picture

Moving up the risk spectrum. But The US will benefit from the Euro collapse in the short term, as a Few Trillion seeks a safe haven as it were. 

Wed, 07/20/2011 - 09:40 | 1473431 Internet Tough Guy
Internet Tough Guy's picture

Euro won't collapse; US will. Sounds like you are positioned badly.

Wed, 07/20/2011 - 09:39 | 1473430 treemagnet
treemagnet's picture

And the truth shall enslave us.  Like Mr. Market will care - what a joke.

Wed, 07/20/2011 - 09:41 | 1473433 RobotTrader
RobotTrader's picture

U.S. bond yields hardly moving on this news.

Wed, 07/20/2011 - 09:43 | 1473437 Internet Tough Guy
Internet Tough Guy's picture

The dollar and Oil are moving. You must be puking up blood. When will you interview the CEO of Exxon? LOL...

Wed, 07/20/2011 - 09:54 | 1473471 Boston
Boston's picture

But here's something new---Treasury yields are losing their downside momentum, and correlation with equities is weakening.

I don't like it.  So I'm starting to move into Bills until we get another spike in yields, ala late June.

Wed, 07/20/2011 - 09:57 | 1473479 Boston
Boston's picture


Wed, 07/20/2011 - 09:41 | 1473435 kito
kito's picture

vigilantes are here, but for what purpose? are they here to push this country into borrowing more? or are they here to push us to borrow less?

Wed, 07/20/2011 - 10:26 | 1473576 InconvenientCou...
InconvenientCounterParty's picture

Is life insurance designed to encourage longer or shorter life for the insured?

Wed, 07/20/2011 - 10:49 | 1473657 Bob Paulson
Bob Paulson's picture

bankrupt the country? take over the assets for fraction of what they are worth? collect on the CDSs? profit on short sales? any or all of the above?

"... the borrower is slave of the lender" Proverbs 22:7 


Wed, 07/20/2011 - 09:44 | 1473439 Ponzi Unit
Ponzi Unit's picture

Not for nothin', but did you see the gold action right after the COMEX close? Steep selloff to shake out weak longs?

If deliberate, perhaps an effective way to scatter longs, and create additional downward pressure this morning as positions are puked up.

Wed, 07/20/2011 - 09:52 | 1473441 virgilcaine
virgilcaine's picture

aapl is coming back to earth. Will it see 400 again?

Wed, 07/20/2011 - 09:59 | 1473497 Undecided
Undecided's picture

Forbes Give greece what it deserves Communism, Discusting!

Wed, 07/20/2011 - 10:17 | 1473544 GeneMarchbanks
GeneMarchbanks's picture


Clicking the 'Save' button over and over is very decisive, either get yourself a new name or stop posting altogether.

Wed, 07/20/2011 - 10:37 | 1473609 Undecided
Undecided's picture

Actually it was taking for ever to save and the site was lagging, so you need to get a grip maybe a morning coffee?

Wed, 07/20/2011 - 10:00 | 1473501 Undecided
Undecided's picture

Forbes Give greece what it deserves Communism, Discusting!

Wed, 07/20/2011 - 10:03 | 1473504 Undecided
Undecided's picture


Wed, 07/20/2011 - 10:07 | 1473510 Elmer Fudd
Elmer Fudd's picture

"Vigilantes are here, but for what purpose? are they here to push this country into borrowing more? or are they here to push us to borrow less?"

-Let me help you out a bit, the vigilantes are here for themselves, to make their wallets fatter.  That is the function of "speculators" to a market, by attempting to help themselves they assist in providing a market driven (accurate) price discovery.  They don't care if you borrow, but the risk of that borrowing should be priced accordingly.

Wed, 07/20/2011 - 10:19 | 1473550 GFORCE
GFORCE's picture

All going to plan. IMF SDRs will replace the dollar.


Wed, 07/20/2011 - 10:23 | 1473565 Elmer Fudd
Elmer Fudd's picture

A Mandat?  When's Napoleon coming to restore sanity?

Wed, 07/20/2011 - 10:34 | 1473597 nscholten
nscholten's picture

It's all bullshit.  US debt rating will never be cut.  Sure there could be a CDS play but fucking come on...ah who owns the fucking rating agencies?????


And where do you put the minus sign on the math questions.  I guess I am the moron.

Wed, 07/20/2011 - 17:07 | 1475208 Edward Fiatski
Edward Fiatski's picture

Bond vigilantes where ya been back in 2009? It's about time, missed ya, bitchez. :)

SIEG HEIL TO A NEW NEW WORLD ORDER CURRENCY, which hasn't been announced yet, though I'm quite sure they won't be disseminating it in paper variants. 

Wed, 07/20/2011 - 18:05 | 1475370 Eireann go Brach
Eireann go Brach's picture

Can someone explain "who are the bond vigilantes and who they consist of? Thanks

Wed, 07/20/2011 - 18:44 | 1475475 DK Delta
DK Delta's picture

So, here is my question. Why is China, the largest creditor in the world, second to the US year-over-year?

Wed, 07/20/2011 - 20:01 | 1475665 StychoKiller
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