This article is pure bullshit.

> In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world

So what? Most trades move the market, even in super-liquid ones. You hit the bid or offer in "market" size, the bid-offer will prob move a tick or two.

> The value of the trade was about $850 million dollars.

No it's not. A futures trade is "on-market", that is it has ZERO value. If yields don't move, his P&L will be zero. What he's done is take the equivalent risk of shorting $850m 10y.

> In simple terms, if that was a direct bond buy, no one would be talking about it.

Yes exactly. And taking the same position in futures is no different. The risk profile is almost exactly the same. 1bn 10y is large-ish, but by no means uncommon.

> However, with the use of futures, you have to have margin capacity behind the trade.

Yes, and so what? I don't know what the margin requirements are for 10y futures, probably about 1% of notional, ie $8.5m . Ie the guy has taken a $850m exposure for an initial outlay of 8.5. That is a heck of a lot easier on the bank account than buying them outright. (Edit: of course he's not buying them, he's selling them. But to sell (short) the physical bonds he'd have to borrow them in the repo market, where you loan cash and take the bond as collateral. Either way you need $850m in cash)

> That means with a single push of a button someone was willing to commit more than $1 billion of real capital

No they weren't. His initial outlay is the margin. That is it. Given there is an upper limit on a bond price (the 0% yield price) his possible losses are capped at something way, way, way less than a $1bn. Let's say the 0% yield price is $105 per 100 notional (i've no idea if this is right, but is approximate enough for this example), then his possible losses are capped at ~5% of notional.

> You only do this if you see an edge

Huh, what? This trade could be for any number of reasons. It could be closing out an existing position, hedging a long physical position (thus taking a position on the spread) or yes maybe an outright punt. But it's hardly earth-shattering. Any mid-sized bank could do a trade like this, and often do.

Edit: re-reading I've just noticed that the article implies this trade could pay-off 10-1 netting the guy 10bn. This is so wrong as to be laughable. The most this guy could make is $850m, and only if the price of treasuries goes to zero! Completely impossible. If the US loses it's AAA rating prices will prob move a dollar or two, e.g go from $98 -> $96 for example, ie he'll make a couple of % of notional.

In short, total nonsense.

Yes, completely agree - moreover - if the trader is going long the futures, he's betting that interest rates will drop, therefore, isn't he betting that the US WON'T lose it's Triple AAA rating (which should cause interest rates to rise)?

(Bearing in mind the other purposes which could exist for the trade - ala hedging, etc.)

Yeah. I'm giving the author the (probably undeserved) benefit of the doubt and assuming the trade was a short. Although I don't think it's expressly stated. (Edit: actually it is, towards the end of the article)

Agreed, and I also don't think that the transaction indicates the person had some sort of insider information about how the deals in Washington would work out. Based on all of the public information out there (comments from ratings agencies, Congressmen themselves, pundits), it seems likely that the US will avoid a true default but that it's credit rating will be downgraded.

Or maybe someone was hedging against the risk of a default? I've you got a ton of money in securities that will lose a lot of value if the US gets downgraded, then it would make sense to hedge against that risk.

Unrelated comment, but man, how are you supposed to read the article when it's blocked by this huge modal that you can't close on a mobile device?

You're not; you're supposed to click on the ad.

    You only do this if you see an edge.

Or you're attempting to manipulate the market.

Good point. It would be interesting to see where the trade originated. If it originates from Britain, there could be a good chance that a foreign central bank is behind it.

But that just doesn't make sense - because most foreign central banks that have the wherewithall to do that own a TON of Treasuries, so they are just making things worse for themselves....don't see how that makes sense.

But I could be missing something here.

The author of the article has absolutely no grasp of futures or how they work. This trade is no big deal, trades this size are done all the time by all sorts of financial institutions for any number of reasons.

Doesn't this also mean that someone(s) is betting $1B that the US will NOT lose it's AAA credit rating? A trade needs someone on both ends...

Yes, but it's a single entity on one end, vs many on the other one. Not symmetric.

It means that someone is betting even more money on that the US will not lose its AAA credit rating.

I don't have a lazy $850MM to play with, but if I had any meaningful exposure to US markets I'd certainly have pulled some chunk out into cash last week in anticipation of opportunities presenting themselves this week and next.

I'm still confident a deal will be done, and won't jump into the politics here, but I think enough damage has been done to spook "the markets" now and in the future (if, for example, we get to have this discussion again in 6 months) for some light bargain hunting.

Is there any credibility in credit rating? Those poisonous mortgage bonds have AAA as well... US having AAA rate is more about patriotism than anything else.

Your credit rating determines the cost of borrowing money - the AAA status is essential if you want to borrow money (i.e. issue bonds to) some of the biggest, most risk-averse funds in the world. If the US loses its AAA rating then you cannot sell bonds so easily and therefore it becomes harder to raise money or balance the books without politically-unpopular tax raises or service cuts.

Does the credit rating have a bigger impact for huge countries such as the US? I see lots of economically stable countries with poor ratings on the list, including Poland (A-) and South Korea (A).

The site is down. Here is the google cache link: http://webcache.googleusercontent.com/search?q=cache:Mu0fyc4...

This relates to a question I just asked about where HN readers are putting their US$ right now. http://news.ycombinator.com/item?id=2816367

One word. Soros.

That was my first thought. Totally amateurish, but hey, why not.

$1 billion bet that the US blows up. $20 billion bet that $1 billion bet that the US blows up itself blows up, well, anything really. Pick five thousand things if necessary which go up, or down, or sideways if market sentiment shifts from "The US cannot possibly default" to "The US will almost certainly not default."

A few weeks later you sell your "US blows up" tickets for 80% of what you paid for them - or 8% of what you paid for them - and drown your sorrows at calling the implosion of the US incorrectly while counting your speculative gains on your own private island.

I think the word for this is "speculative attack."

It _could_ be. It could also be any one of a 100,000 other institutions which trade treasury futures. This is not a big trade or a big deal. This article is very ill-informed nonsense.

I'd have said "Khan!", but it's the wrong movie.

What is a sovereign credit rating:

http://en.wikipedia.org/wiki/Credit_rating#Sovereign_credit_...

List of sovereign credit ratings sorted by country:

http://en.wikipedia.org/wiki/List_of_countries_by_credit_rat...

A chart comparing USA's credit rating to other nation's credit ratings. Yay charts. I'd be more interested in the algorithm used to calculate the rating than the rating itself.

http://www.creditscore.net/sovereign-credit-ratings/

Planet Money did a podcast the other day on exactly how the ratings are created. http://www.npr.org/blogs/money/2011/07/26/138721364/the-tues...

TLDL: There's no algorithm. There's no one ratio you can look at. Analysts travel to the country, assess how likely it is to pay its debt, and report back. A few people listen to the evidence then take a vote on the new rating.

And, more importantly, a change in rating from AAA to AA+ doesn't mean anything compared to a sovereign being derated from investment-grade to non-investment-grade.

Derating may be a black eye to the US's status in the world economy, it's hardly the end of anyone investing in Treasury Bills.

[EDIT] That's from the podcast itself. I listened to the whole thing. Downvote the parent if you disagree.

i am by no means at all knowledgeable in finance, but do these credit ratings really have any value?

According to S&P

Spain has AA

Italy has A+

many others have A.

is this really a credit rating, or more about how much faith citizens have in their own country. with all due respect, i find it difficult to believe that the US could have a AAA rating. of course, the earning potential of the US is huge, but its current standing with regards to debt is not so good.

or maybe i dont quite understand how the ratings work?

They do have real value. All central banks and banking regulators use them to determine the quality of the collateral that can be posted.

So, for instance, say you are a big bank that wants to borrow cash overnight at a low-interest rate - you have to put something up as collateral. Various central banks have various instruments for various things, but for the most part they tend to require 'investment grade' securities - which is why Greece has been causing such a kurfuffle because if they have a 'selective default', then the ratings agencies will downgrade to junk status and financial institutions won't be able to use Greek gov't bonds as collateral anymore.

That's an overly simplified case, but that can be extended to any where that requires collateral. Most, if not all, financial institutions swear by those credit ratings.

The rating is only concerned with whether he country will pay back it's debt on terms. Only paying back 99% is a binary default. Italy uses the Euro, which it doesn't own. The US owns the dollar. The Treasury could mint $1B coins today and sell them to the Fed for the cost of the metal.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/...

If it weren’t for this mishegas with the debt ceiling, there would be no doubt that the US would be able to pay its obligations, and even if Congress doesn’t act in time, the 14th Amendment ensures that the bond-holders would be first in line to get paid.

The US is one of the largest economies in the world; its overall tax revenues are low compared with other developed countries; as someone else pointed out, it controls its own money supply; it has enjoyed low inflation for the past thirty years; Americans grumble about our taxes but unlike Argentines and Greeks, we generally pay what we owe.

What it really represents is to what degree others think a country can pay back it's debts. The US has a higher rating that Spain or Italy because those countries will have a much harder time paying back their debts.

I think alot of people really underestimate the size of the US economy.

The good news..that means a debt ceiling deal was reached last night and that also means that due to credit rating agencies saying that a long term debt deal would keep the AAA rating that the House plan deal probably got accepted..as far enough House votes and enough Senate votes as they do not have time to do two competing bills at once in both US Congress Houses..

Also, it could be relatively minor..say downgrade to AA from AAA pending how the rest plays out in 6 to 8 months.

How is it, that this can be done anonymously? Are trades protected by the first amendment? I have to admit, someone is expressing a very strong opinion here.

Personally I think this is a mistake. Wasn't the financial meltdown caused by the general lack of transparancy?