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What CDS Speculators? The Reason Why Greek Spreads Blew Up Is Because Of Bond Selling, Not CDS Buying

Tyler Durden's picture


There is nothing quite as liberating as jumping on the bandwagon of scapegoating that which one does not understand. The idiocy of the chorus which blames CDS "speculators" for the mysterious kidnapping and rape of the Easter Bunny and Santa Claus' stomach stapling, not to mention the imminent Greek implosion (NOT as a function of a funding crisis, but due to the one soon to be unending strike, which will commence once Greeks realize their wages are about to be cut by 250% and the new retirement age will the same as that of Yoda), is just getting surreal. And if the cheap seats housing the portly derrieres of all those CDS "experts" need yet more proof just how full of excrement their pointless multi-syllabic exhortations are, we present Credit Trader's very diplomatic presentation (diplomatic, because our version would have included a preponderance of breathless f-bombs, which is why we wisely decided against writing one), which is sufficient and necessary to hopefully shut all these empty chatterboxes up for good. Alas, that ain't happening. Either way, here is the data, which will certainly not make an impression on anyone except those why actually do understand how the CDS market works. For everyone else (the "it's like selling a warehouse full of feces... in backwardation, thank you speculators... buying crap insurance on the warehouse and then redirecting the Chipotle lunch hour crowd into it" people), start writing your disgruntled, opinionated and Thesaurus-worthy retorts. Oh, and by the way, are speculators guilty that CDS spreads on Greece have collapsed by over 120 bps in the past two weeks? Oddly, we have not heard anything about that at all in the idiotstream media.

Here's an idea - how about clamping down on all those idiot money, mutual funds who bought GGBs at 15 bps over Bunds and now can't wait to sell enough (leaving for the moment that they did so based on flawed macroeconomic data, courtesy of a Greek FinMin which materially misrepresented the country's GDP and interest payments).

Rant over. Here is Credit Trader.

The last two days have seen notable compression in sovereign spreads globally as rumors come and go on the short-term solution for Greece et al.

These three charts might be useful for getting some perspective:

Chart 1) The first chart compares the 5Y GGB to the 5Y CDS (both relative to Germany). Clearly in AUG08, GGBs led the weakness and CDS followed as GGBs remained major underperformers. CDS actually led the rally back in Q1 2009. In NOV09, CDS started to leak wider first but very quickly GGBs caught up and until the last few weeks have tracked perfectly with higher beta moves. Since the Jan 26th GGB issue, Greek 5Y CDS has actually compressed (red arrow) while GGBs have continued to widen in spread.

Chart 2) shows the GGB-CDS basis for the 5Y and 10Y maturity. Once again this is adjusted for Germany (i.e GGB is spread over Bunds and CDS is greek CDS over Germany CDS). The most notable thing is that the basis is negative and in 5Y getting more negative - this means that 5Y GGBs trade with higher risk premia than 5Y CDS (which seems odd given speculators were apparently responsible for this damage). This negative basis (bonds underperforming CDS) has continued since the new issue in Jan for 5Y but in 10Y has stabilized. This is atypical behavior as is clear from the chart and we suspect is driven by derisking from the longer-dated segment of the curve in preparation for the new 10Y issue.

Chart 3) really exaggerates this point as we have seen GGB 5s10s continue to invert since that Jan new issue as the GGB term structure flattens up notably in the short-end and inverts even greater the longer-end. This suggests an implicit expansion of spread duration in GGBs (which may help explain the basis movement differences). This is opposed to the CDS 5s10s curve which has steepened notably since the Jan new issue - almost perfectly balancing the apparent risk appetite in longer-dated GGBs.

The pull-back in risk in Greece is notable but remains extremely elevated.

The term structure of yields is basically flat from 12 months out and the term structure of credit is considerably inverted in GGBs.

It should be clear from these charts that CDS were not the driver of risk up or down but held their somewhat barometer-like relationship to cash quite healthily.

The inversion/flattening of the GGB 5s10s curve and steepening of the CDS 5s10s curve suggest a derisking among smarter money into the pending 10Y auction while slower money can see 10Y GGB yields drop as it appears the 'worst' is over.

We suggest otherwise and that the derisking will lead to decent demand for the 10Y issue but at very wide concessions - bulls will point to the B2C being high but realists will see a major concession as indicative of a true risk premium.

From CreditTrader



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Tue, 03/02/2010 - 22:50 | Link to Comment lsbumblebee
lsbumblebee's picture

It's your show Tyler. Rant away.

Wed, 03/03/2010 - 02:58 | Link to Comment Anonymous
Wed, 03/03/2010 - 10:30 | Link to Comment Anonymous
Tue, 03/02/2010 - 22:52 | Link to Comment deadhead
deadhead's picture

Rant over

Tyler and crew: Please do NOT ever stop ranting.  Thank you!

Wed, 03/03/2010 - 03:01 | Link to Comment Anonymous
Tue, 03/02/2010 - 22:54 | Link to Comment jm
jm's picture

Here's an idea: government policy right now is all about spread compression. 

CDS gives you synthetic spread compression, more accurately risk transfer.  Governments loved CDS risk transfer when it eased funding costs.

Now that they have chosen taxpayers to be the counterparty of last resort and spreads are going up, they gotta blame somebody for getting themselves in this spot.

Tue, 03/02/2010 - 23:04 | Link to Comment _Biggs_
_Biggs_'s picture

I'm lost.  Why are CDS's good?  It seems like the world was fine before their creation and now it looks a tad different.  Plus if (according to the WSJ about 13 months ago) 40% of CDS trades are naked, why is this market good?  Thanks.

Tue, 03/02/2010 - 23:13 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

CDS's are neither good or bad. The end users are.

Tue, 03/02/2010 - 23:28 | Link to Comment jm
jm's picture

As was said, they are a tool to manage risk, not angels or demons.

To me, all problems ultimately trace back to fundamentals of the underlying.  Government bond fundamentals suck.  The technicals (the issuance) suck.

So the elected powers are pissed about an instrument that correctly prices in how much the underlying sucks.  WTF!?!  And they want their electorate to be pissed too.

A more effective solution is to fix sov bond fundamentals.

A responsible government would never put counterparty risk for CDS on taxpayer backs anyway.  What kind of government do you have?  

Tue, 03/02/2010 - 23:33 | Link to Comment Anonymous
Wed, 03/03/2010 - 07:35 | Link to Comment Alexandra Hamilton
Alexandra Hamilton's picture

CDS don't correctly price anything. If they did they would have indicated the impending financial crisis a long time before it happened. They didn't they are fraud like everything else in finance.


Wed, 03/03/2010 - 07:43 | Link to Comment jm
jm's picture

Point well taken.

They are pricing in risks that governments don't want to concern themselves with.

Wed, 03/03/2010 - 09:04 | Link to Comment zhandax
zhandax's picture

What kind of government do you have?

The kind you bought and paid for, apparently.

Tue, 03/02/2010 - 23:57 | Link to Comment jm
jm's picture

There are two separate issues here, no?

One pertains to the features of the instrument itself impacting the contracting parties.

The other issue is the collective impact of the sheer size of the notional on society as a whole.  This is a very serious problem.

Fixing the fundamentals is the first step to alleviating the both problems IMHO.

Wed, 03/03/2010 - 01:19 | Link to Comment dumpster
dumpster's picture

the real skinny greece

Dear Comrades In Golden Arms,

Greece will fail and be rescued is all that is discussed in the financial world. Here is the real skinny:

1. Greece getting bailed out means QE (printing of money) to infinity. That means gold would rise from here to $1650 by January of 2011, or as Martin Armstrong said, by June of 2011. The dollar would fall. Equities and commodities would rise.

2. Greece getting flushed means that would enrich the CDS OTC derivative tool. Immediately the next target currencies will be attacked by this tool. Currencies will fall like dominoes. At first the dollar will strengthen, equities will fall and gold will go lower. However, soon the recognition will come that a disaster has occurred that is more serious than the Lehman flushing. Confidence in currencies will fall everywhere. Gold will then rise not to $1650 by the same time in 2011 but to $5000 and perhaps beyond.

Either way both paved the road to a single virtual reserve currency and a single Central Bank (IMF) of Central Banks.

If Greece is bailed out it will take longer for the establishment of the single virtual reserve currency. If Greece is flushed it will happen so fast you will lose your breathe.

Either way I see gold as the only reliable fundamentally correct safe harbor. Gold will play a part at a very high price with the single virtual reserve currency in order to keep gold from being a competitor with it.

Gold’s role will be in the form of the Federal Reserve Gold Certificate Ratio, not tied to the dollar, but rather tied to the single virtual reserve currency in a ratio to a measure of world liquidity. There will be no interest rate automaticity to the new form for gold’s role in a monetary system. It will follow the many articles I have written on the FRGCR but not tied to the dollar but rather the single virtual reserve currency.

Gold will not be fixed or convertible but will trade within a market as a close band of the price gold is trading at when the single virtual reserve currency is created and will lend to this construct some real validity.

I do not favor any of this, but it will occur.

There is no other possibility to this unprecedented calamity at hand.


Wed, 03/03/2010 - 03:07 | Link to Comment Anonymous
Wed, 03/03/2010 - 03:16 | Link to Comment swamp
swamp's picture

I'm clueless as to why these opaque non financial performance instruments are good, for the taxpayer counter party anyway. They sure make for big bonuses. Buffet said they are weapons of mass destruction. Then he bought some. 

Wed, 03/03/2010 - 00:19 | Link to Comment Anonymous
Wed, 03/03/2010 - 01:38 | Link to Comment ernan
ernan's picture

If it is a choice between the politicians actually accepting responsibility for their actions and the consequences or pointing the finger at a Greedy Bankster well...

I bet we are going to hear a lot more about how greedy bankers are destroying helpless nations

Tue, 03/02/2010 - 23:48 | Link to Comment Catullus
Catullus's picture

It's nights like this that I really miss the greatest switch hitter in Zerohedge history -- WallStreetPro.

Wed, 03/03/2010 - 03:02 | Link to Comment faustian bargain
faustian bargain's picture


Tue, 03/02/2010 - 23:57 | Link to Comment SolventGreekStud
SolventGreekStud's picture

"In Goldman we trust"

Wed, 03/03/2010 - 00:03 | Link to Comment Bigdaddydvo
Bigdaddydvo's picture

(NOT as a function of a funding crisis, but due to the one soon to be unending strike, which will commence once Greeks realize their wages are about to be cut by 250% and the new retirement age will the same as that of Yoda)


*coffee on the computer screen*

Wed, 03/03/2010 - 00:49 | Link to Comment percolator
percolator's picture

You're ranting is hysterical, keep it up!

Wed, 03/03/2010 - 01:06 | Link to Comment BlackBeard
BlackBeard's picture

jyeah told ya so.  and when the clowns ban sovereign CDS, that's when we're going to see massive liquidation.  Why? because longs won't be able to hedge themselves.  No bid baby!

Wed, 03/03/2010 - 01:48 | Link to Comment jmc8888
jmc8888's picture

Once again instead of focusing on the problem, blame the symptoms that arrise out of CDS. 

'He's not breathing'.

'Quick give the man some air'

Euro leaders need to get their head put on straight.

The key here is that they (including our mainstream media) are afraid of either finding real price discovery (what's under the rock), or they really believe every market move is rigged? Maybe some projection on their part? Who knows. It could just be mass incompetence.

I've got a nice yellow mainstream for the media.

Wed, 03/03/2010 - 01:35 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

if this (the growth of new investment accounts in China):


is not a 1999 flash back, I don't know what is. (the largest contrarian indicator out there)


p.s. I find it ironic how everyone choses to believe every Greek debt related "official"  rumor from the same people who COOKED books to get into the EU. It's like calling Mr Maddofff for the consultation on a fundamental/value investment strategy. 

Wed, 03/03/2010 - 01:55 | Link to Comment FreakuentFlyer
FreakuentFlyer's picture

what about HFT? they should get at least 70% of the blame!

Wed, 03/03/2010 - 03:54 | Link to Comment Yori
Yori's picture

i agree. great post (or good job choosing to post this one). CDS have for far too long become the political scapegoat for all problems far and wide and its good to see each and every unbiased report that reports the facts rather than the emotions. even bloomberg made a mention last week. link to the bloomberg report is at this site:




Wed, 03/03/2010 - 06:18 | Link to Comment Anonymous
Wed, 03/03/2010 - 06:21 | Link to Comment Anonymous
Wed, 03/03/2010 - 06:46 | Link to Comment Bylinka (not verified)
Wed, 03/03/2010 - 06:48 | Link to Comment Anonymous
Wed, 03/03/2010 - 07:21 | Link to Comment Cerulean
Cerulean's picture

Does anyone know where to find the outstanding CDS per country. I keep on reading that they are way smaller than the equivalent governments bonds .

Germany has €1.04 T oustanding govies, France €1.24T, Italy €1.44T, Greece €283B etc...

Any ideas on the equivalent CDS'

Wed, 03/03/2010 - 07:41 | Link to Comment Anonymous
Wed, 03/03/2010 - 09:56 | Link to Comment Anonymous
Wed, 03/03/2010 - 08:37 | Link to Comment Anonymous
Wed, 03/03/2010 - 11:40 | Link to Comment Womb Service
Womb Service's picture

Amusing. They claim to hate ZH, yet they read it religiously.

Wed, 03/03/2010 - 09:46 | Link to Comment Anonymous
Wed, 03/03/2010 - 12:54 | Link to Comment jm
jm's picture

The right to take positions as you see fit should be defended. 

The rights of people that have no business being counterparties should be defended too.

Wed, 03/03/2010 - 11:25 | Link to Comment chunkylover42
chunkylover42's picture

it's getting awfully diluted around here with anonymous comments.

Wed, 03/03/2010 - 12:21 | Link to Comment Anonymous
Thu, 03/04/2010 - 17:39 | Link to Comment Anonymous
Fri, 04/16/2010 - 09:32 | Link to Comment mark456
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