Dispersion Between Pre- and Post-"Default" Cash Management Bills Hits 11 bps

Yesterday we reported of a dramatic dispersion between the just maturing July 28 Bills and the "post default" August 4th version of short-term funding. We also suggested that this is probably a spread that should be promptly collapsed as in the very unlikely event there is a default, the last thing on your counterparty's mind will be trying to collect the several MMs owed to him. Well, the July 28s matured today, and the spread appears to have evaporated. Not so fast. Those who so wish, can still put on the compression trade, although not using plain vanilla bonds, but CMBs instead. In fact, as of today, traders can capitalize on the Treasury's D-Day, with the spread between the August 2 and August 4 CMBs rising from 5 bps to 11 bps in 2 days. Now the reason why this trade, with lots of leverage would be ideal, is that, as mentioned above, if the US does default, Repo desks and Prime Brokers will have much muich bigger problems, and two, as we pointed out, it will imminently become "uncovered" that the Fed has a secret stash of cash, up to the amount of about half a trillion, which may easily carry the Treasury through the new year, in which case the spread will immediately collapse. Of course, we could be wrong, and everyone who plays the compression will blow up in an epic supernova that will make Boaz Weinsten's legendary basis trade annihilation seems like amateur hour.


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