What’s the chances? Depends on what the assumed recovery rate is. Here’s the cost of insurance.
Source: Investing.com accessed 5/20/2023.
What’s the chances? Depends on what the assumed recovery rate is. Here’s the cost of insurance.
Source: Investing.com accessed 5/20/2023.
Elise Stefanik may be from New York but she is one racist POS:
https://www.msn.com/en-us/news/politics/top-republican-blasted-by-former-gop-rep-for-spreading-lie-about-migrants/ar-AA1bs5yB?ocid=msedgntp&cvid=f3cfff1c07274a95b1787c7a2fba8af3&ei=14
Stefanik, the representative for New York’s 21st Congressional District and third highest-ranking Republican in the House of Representatives, shared a New York Post story to Twitter last Saturday, which claimed that 20 homeless veterans had been made to leave a hotel in Orange County, just north of New York City, to make room for migrants. The newspaper claimed that the migrants were being bused to Orange County by the city’s mayor, Eric Adams …. A subsequent article published May 18th reveals Sharon Toney-Finch admits to fabricating the story. “Shortly after that, when I asked her why she would make something like that up, she said, ‘I had to help the veterans.’…Nobody was evicted. That’s for sure.”
Stefanik should be blasting the racists governors of Texas and Florida for creating this issue in NYC and abusing migrants for political purposes but she’s in bed with Kevin McCarthy.
https://www.msci.com/www/blog-posts/the-cds-market-s-view-on-us/03820087801
Slightly dated, but still interesting.
s of May 3, the spread on one-year credit-default swaps (CDS) on the U.S. government implied a 3.9% probability that the U.S. would default — double the level from two months earlier and nearly 10 times higher than at the beginning of the year.
Our methodology is based on the Treasury most likely to be delivered in the CDS auction process and offers insights into how CDS spreads may also reflect noncredit factors.
This was very helpful – thanks!
Always my pleasure to contribute. I wish I was being facetious when I say a good many of my comments are blathering, or maybe I prefer the term “venting”.
But what do the Brits say “horses are for courses”?? or a “leopard doesn’t change its spots”?? Take a pretty average guy and have him comment on a blog with cerebral posts and not much has changed. But I toss some good nuggets into the alchemy here and there.
By Chuck Schumer’s calculation, the House needs four days, the Senate seven, to pass a debt ceiling increase. There are eleven days left in May, and June 1 is the earliest date on which, by Yellen’s and CBO’s calculation, Treasury may default. Assuming nothing extraordinary happens – Treasury issuing perpetuals or Congress accelerating the legislative process – we have now entered a period in which default my be inevitable, based on nothing more than the standard business of government finance.
Wonder what that CDS rate will look like in Monday.
June 1st is only for a deal. Real default would be weeks later.
Just can’t help yourself, can you?
Let me explain… The Federal government makes payments every day , but there are dates on which which the government makes large payments. The government receives revenue every day, but there are some days on which the government receives large revenue payments. Many of those large inflows and outflows come at regular times, which has the effect of increasing or decreasing Treasury’s cash holdings at those times. The last big inflow happened in mid-Aprill, and cash holdings have fallen since then. Still with me? Don’t want to confuse you. So the turn of each month brings sizable payments, which drains cash. Now here’s the tricky part – May 31/June 1 is the turn of the month which comes before a big cash inflow on June 15, and it had been since April 15 that there has been a large inflow. This is important, so try to understand…really try… From June 1 to June 15, Treasury cash holdings will be particularly low. Do you see why that’s the case? If you don’t, go back and read the part about big inflows and outflows again, OK? Cash holdings will be particularly low in the June 1-June 15 period, so small net outflows can cause default in that period. Let me repat this, because it’s apparent from your comment that you haven’t grasped this critical point – small net outflows can cause default in the June1-June 15 period.
Once the big inflow occurs around June 15 – that is to say “weeks later” than June 1 – the odds of default drop for a while. Weeks later, the odds of default are lower than in the June1-June 15 period. See?
Just keep reading this until it becomes clear to you. It’s really not that complicated. And don’t make Karen read it – you read it.
I thought I read McCarthy promised he would give members 72 hours to read the bill. So….. I don’t know how that works into it but thought it was interesting
Maybe I’m being a little slow today but some basic modeling of this would be most appreciated.
https://www.nytimes.com/2023/05/20/business/economy/car-prices-inflation.html
May 20, 2023
Why Is Inflation So Stubborn? Cars Are Part of the Answer.
Prices of new and used vehicles were supposed to recede quickly as supply chain problems dissipated. The market had other ideas.
By Lydia DePillis and Jeanna Smialek
Car prices soared after the coronavirus lockdowns, and two years into the United States’ worst inflationary episode since the 1980s, the industry demonstrates that getting back to normal will be a long and lurching ride.
In 2021 and early 2022, global shipping problems, a semiconductor shortage and factory shutdowns coincided with strong demand to push vehicle prices sharply higher. Economists had hoped that prices might ease as supply chains healed and the Federal Reserve’s interest rate increases deterred borrowers.
Instead, prices for new cars have risen further. Domestic automakers are still producing fewer cars and focusing on more profitable luxury models. Used car prices helped to lower overall inflation late last year, but rebounded in April as short supply collided with a surge in demand.
Echoes from the industry’s pandemic disruptions are reverberating through the economy even though the emergency has formally ended, and illustrate why the Fed’s fight to quash inflation could be a long one as consumers continued spending despite higher prices….
How is inflation stubborn??? Sub 3% cpi over 19 months is bleh.
Maybe one could say that for the period from June 2022 until now but that was less than 12 months ago.
If you want to be taken seriously – start writing comments that make sense.
https://fred.stlouisfed.org/graph/?g=UQC8
January 30, 2020
Consumer Price Indexes for New and Used cars & trucks, 2020-2023
(Percent change)
https://fred.stlouisfed.org/graph/?g=UQCH
January 30, 2020
Consumer Price Indexes for New and Used cars & trucks, 2020-2023
(Indexed to 2020)
https://www.globaltimes.cn/page/202305/1290669.shtml
May 14, 2023
China becomes world’s largest auto exporter in Q1, outpacing Japan: data
China exported 1.07 million vehicles in the first quarter of 2023, surging by 58.3 percent year-on-year, data from China’s General Administration of Customs (GAC) recently revealed, indicating that China has now become the world’s largest auto exporter, outpacing Japan.
China’s total vehicle export value from January to April stood at 7.67 trillion yuan, up 10.6 percent year-on-year, with car exports now playing an important role in the country’s foreign trade structure.
The Waigaoqiao Port in Shanghai saw a total of 231,000 vehicles exported to Europe, Southeast Asia, South America and Africa in the first quarter of 2023, accounting for 40 percent of the car exports, China Media Group reported
In April alone, China exported 376,000 vehicles, surging 2.7 times over the same period in 2022, lifted by strong production capacity of 2.13 million cars in the month, according to the China Association of Automobile Manufacturers.
Exports of new-energy vehicles account for the majority of vehicles being shipped abroad, hitting 100,000 NEVs in April, which is 8.4 times that of the same month in 2022.
Last year, China became the world’s second largest car exporter by surpassing Germany. GAC data showed that China exported 3.22 million vehicles in 2022, increasing 56.8 percent year-on-year, while Germany exported 2.61 million vehicles….
As of May 3, the spread on one-year credit-default swaps (CDS) on the U.S. government implied a 3.9% probability that the U.S. would default — double the level from two months earlier and nearly 10 times higher than at the beginning of the year.
Our methodology is based on the Treasury most likely to be delivered in the CDS auction process and offers insights into how CDS spreads may also reflect noncredit factors.
This was very helpful – thanks!
China’s draconian foreign lending practices are getting more attention:
https://apnews.com/article/china-debt-banking-loans-financial-developing-countries-collapse-8df6f9fac3e1e758d0e6d8d5dfbd3ed6
From the article:
“Behind the scenes is China’s reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.
“Countries in AP’s analysis had as much as 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying off foreign debt. Two of them, Zambia and Sri Lanka, have already gone into default, unable to make even interest payments on loans financing the construction of ports, mines and power plants.”
As I tried to note – Brad Setser is back to blogging. And he has a couple of excellent blog posts on this issue.
You are incorrect. Even given an assumed recovery rate, CDS does not give the “chances” of default under the physical measure. The CDS rate incorporates a risk adjustment. It also reflects counterparty risk, in particular the likelihood that the seller of protection will perform.
Since default is likely to cause a major economic downturn, the risk adjustment (i.e., the difference between the probability under the equivalent measure implied by the CDS and the probability under the physical measure) is likely to be very large: insurance that pays off in bad states of the world is very expensive. (Marginal utility is high when income/wealth/consumption are low).
Counterparty risk likely cuts the other way. Will the bank that sells you protection be around to perform if default comes and rocks the financial system? Nobody pays much for protection that is unlikely to pay off when promised.
Which effect dominates? Who knows? Regardless, inferring the probability of default from CDS prices is a mugs game. CDS prices depend on a lot more than the objective probability of default and the payoff conditional on default.
Craig Pirrong: Yes, you’re right. I’ve used the standard assumption of risk neutrality. Otherwise, I’d need to assume a rate of risk aversion.
Just curious how the mechanics of this process works. When it comes to treasuries, i don’t believe there will be any risk that it wont be paid. The risk is that it wont be paid on time. If you buy insurance, what actually gets paid at the time treasury fails to remit? And who collects when treasury finally remits a couple months later. As an investor, what you lose is a couple months interest and access to those fund for the original funds for other investments for the couple of months, which may not be inconsequential. Its the lack of access for a couple of months, during a period of high volatility, that is a problem for investors looking to make a profit. Anbody with precise details on how this would actually play out, would love to hear your thoughts.
Some Treasury holders need to use payments to make payments. Often, the payments owed by Treasury holders are scheduled for the same day or a few days after the payment from Treasury is due. If Treasury defaults, but later makes good, the holder of the Treasury may have defaulted on their own obligation before Treasury can make good.
And that default leads to another default, and so on. Big, big, big shock which cascades through the system, even though it’s assumed Treasury will eventually make good on payments. There is also a “riskless asset” assumption which receives a serious dent if Treasury defaults and that would lead to all kinds of adjustments in portfolio risk assessments, making the whole financial world more expensive.
Menzie has mentioned the “recovery rate” assumption that is involved in pricing CDS. That’s where your point about Treasury eventually making good comes in. If Treasury is assumed to make good on payments, then the recovery rate is 100% minus some discount for delay – and for the risk that the writer of CDS may default, as mentioned by Mr. Pirrong. That assumption of full recovery is why CDS rates on Treasuies are as low as they are.
You can sell a defaulted Treasury for less than par value, and the value at which you can sell it is determined by an assumption of 100% recovery on some reasonably nearby date. Crudely stated, CDS help help defray the discount on defaulted Treasuries.
However, unless the holder of the defaulted Treasury has already arranged the sale of the defaulted paper, it may be impossible to avoid subsequent default on the holder’s own obligations, and that’s how the cascade of defaults gets started.
Sorry, I got carried away.
much appreciated. so if I have a CDS on a treasury, and it defaults, I expect to get the same payout from whoever sold me the CDS. They are then on the hook for when, or if, the treasury is actually paid off? my expectation is that if the CDS seller is well run, that contingency has already been thought through, as opposed to the original holder of the treasury who bough the asset expecting proper payout.
do we know how big the CDS market is for treasuries? since the expectation has been they will always pay off on time, I would actually expect there to have been a small CDS market, at least until recently.
but short answer, if a person bough insurance for their treasuries, and the counterparty remains solvent, they should receive their treasury payout in a reasonable time frame. it is the holder of the cds who then sits in limbo until things get resolved. but the original holder is out the cost of the insurance, which is up an order of magnitude from a year ago.
why are the republicans intent on costing the country and its investors so much wasted money? foolish.
Just can’t help yourself, can you?
Let me explain… The Federal government makes payments every day , but there are dates on which which the government makes large payments. The government receives revenue every day, but there are some days on which the government receives large revenue payments. Many of those large inflows and outflows come at regular times, which has the effect of increasing or decreasing Treasury’s cash holdings at those times. The last big inflow happened in mid-Aprill, and cash holdings have fallen since then. Still with me? Don’t want to confuse you. So the turn of each month brings sizable payments, which drains cash. Now here’s the tricky part – May 31/June 1 is the turn of the month which comes before a big cash inflow on June 15, and it had been since April 15 that there has been a large inflow. This is important, so try to understand…really try… From June 1 to June 15, Treasury cash holdings will be particularly low. Do you see why that’s the case? If you don’t, go back and read the part about big inflows and outflows again, OK? Cash holdings will be particularly low in the June 1-June 15 period, so small net outflows can cause default in that period. Let me repat this, because it’s apparent from your comment that you haven’t grasped this critical point – small net outflows can cause default in the June1-June 15 period.
Once the big inflow occurs around June 15 – that is to say “weeks later” than June 1 – the odds of default drop for a while. Weeks later, the odds of default are lower than in the June1-June 15 period. See?
Just keep reading this until it becomes clear to you. It’s really not that complicated. And don’t make Karen read it – you read it.
@ Macroduck
I assume these inflows and outflows to U.S. Dept. of Treasury is what Yellen has been preoccupying herself with lately, whether she enjoys it or not. I’m guessing that even if Yellen “not into” crocheting, she’d rather be crocheting right about now, at this point of the legislative proceedings. You know, Republican extortion of the American people that Biden is willing to now foster and encourage. Biden sitting down with Republicans and giving them everything they want reminds me of the Reagan slogan “We don’t deal with terrorists”.
https://www.pbs.org/newshour/show/expert-analyzes-new-account-of-gop-deal-that-used-iran-hostage-crisis-for-gain
Biden is killing his base, which is why guys like me wanted Sanders instead. Because Democrats who insist year after year on cannibalizing their own base and then saying “Why aren’t Democrats more active voters during elections??”.
Keep robbing government benefits earned through payments of taxes over an entire lifetime from your own political base and keep on asking the same dumb question every election cycle: “Why aren’t Democrats more active voters during elections??”. “Deep mystery”…….. deep deep mystery………
JohnH keeps peddling the lie that the US government does not admit to how much our aide to Ukraine is costing. Jonny boy wants an audit. Well it seems they did do an audit and they were off by $3 billion – but not in the direction Jonny boy has been claiming!
https://www.reuters.com/world/europe/pentagon-accounting-error-overvalued-ukraine-aid-by-3-billion-sources-2023-05-18/
Pentagon accounting error overvalued Ukraine weapons aid by $3 billion
Could someone tell Putin he needs a new pet poodle?
can anyone tell you what the stuff the puzzle palace in arlington has on its books are worth?
the president has made 37 as of last week ‘releases’ from us pentagon assets of weapons and munitions, these were described in terms of items, and the prices were estimated for those items.
book price of anything in the pentagon is suspect. the pentagon has never had a clean audit of its books.
in response to congress being concerned that military equipment is not “valued” properly the pentagon has run a program to improve military equipment valuation (mev), which i saw in the mid oughts.
you hope they are serious using an acronym!
seems we are playing to the mev problem.
for the weapons and munitions were sent they are now saying the headline price was overstated.
how they get that with mev still not passing audit is something to wonder about.
when i saw mev i suspected it was setting the price too high…. but that was based on specifications not being fully tested or delivered as in major weapons…..
Well it seems there is a lot of auditing of the aid going to Ukraine:
https://www.ifw-kiel.de/topics/war-against-ukraine/ukraine-support-tracker/
Ukraine Support Tracker
© European Union
A Database of Military, Financial and Humanitarian Aid to Ukraine
The Ukraine Support Tracker lists and quantifies military, financial and humanitarian aid promised by governments to Ukraine between January 24, 2022 and currently through February 24, 2023. It covers 40 countries, specifically the EU member states, other members of the G7, as well as Australia, South Korea, Turkey, Norway, New Zealand, Switzerland, China, Taiwan and India. The database is intended to support a facts-based discussion about support to Ukraine.
We focus on government-to-government transfers into Ukraine. Due to a lack of comparable and reliable data, we do not quantify private donations or transfers by international organizations like the Red Cross. For more details see below. We are continuously expanding, correcting, and improving this project. We therefore very much welcome any help to improve the tracker. We are very grateful for the many comments and suggestions we have received. Please send feedback and comments to ukrainetracker@ifw-kiel.de
Now this will set JohnH off as having a facts based discussion goes against his style.
Politico discusses the individuals trying to ameliorate Republicans’ extortion of the American people:
“Inside the building, a Treasury spokesperson said Yellen and Deputy Secretary Wally Adeyemo are on a daily call with the Treasury office that tracks developments in global trading, known as the markets room. Yellen has been getting a daily briefing on the X-date forecast for the last few months.
Ben Harris, who recently stepped down as Treasury’s chief economist, said the department’s “apolitical role” is underappreciated. He said ‘a lot of the people who are engaged in these discussions are career civil servants whose only real interest is the health of the financial system.’
Who are they?
Treasury fiscal assistant secretary David Lebryk, the highest-ranking career official at the department, is responsible for financing the government’s operations and overseeing the forecast of when it will run out of cash. Lebryk, who has Harvard degrees in economics and public administration, joined Treasury as an intern in 1989. In addition to determining the X-date, his group would also play an important role in potential payment prioritization after the deadline.
Assistant secretary for financial markets Joshua Frost, a political appointee confirmed by the Senate about a year ago, is tasked with understanding how the market is reacting – including bank executives and credit rating agencies. He spent more than two decades at the Federal Reserve Bank of New York. Like Lebryk, he reports to Under Secretary for Domestic Finance Nellie Liang, another Fed veteran.
Treasury is also part of the administration’s review of debt-limit related legal questions, including the potential invocation of the 14th Amendment. Key players on Treasury’s legal team include general counsel Neil MacBride and principal deputy general counsel Laurie Schaffer, who earlier served at the Fed. Treasury’s main liaison to Capitol Hill is assistant secretary for legislative affairs Jonathan Davidson, a long-time congressional aide who was previously chief of staff to Sen.Michael Bennet (D-Colo.).”
https://www.politico.com/news/2023/05/22/treasury-janet-yellen-debt-limit-00098135