While our Congress slashes our social safety net and spews economic fiction on how deficits somehow matter when it comes to our jobs crisis (they do not at this point), traders are placing bets the United States is downgraded and even goes into default.
The bet that shook up the world today was a $1 billion dollar futures trade.
Someone dropped a bomb on the bond market Thursday – a $1 billion Armageddon trade betting the United States will lose its AAA credit rating.
In one moment, an invisible trader placed a single trade that moved the most liquid debt market in the world.
The massive trade wasn’t placed in bonds themselves; it was placed in the futures market.
The trade was for block trades of 5,370 10-year Treasury futures executed at 124-03 and 3,100 Treasury bond futures executed at 125-01.
The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.
However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.
You only do this if you see an edge.
This means someone is confident that the United States is either going to default or is going to lose its AAA rating. That someone is willing to bet the proverbial farm that U.S. interest rates will be going up.
This is while Moody's proclaimed the U.S. will keep it's AAA rating, although will probably be slapped with a negative outlook.
Why would Moody's give the United States a negative outlook? It's not actually the insanity going on in Congress at the moment. It's economic growth
If we're convinced that the economy takes off in 2012 and shows very strong growth, that makes the whole process of fiscal consolidation somewhat easier.
S&P, on the other hand, is demanding austerity, calling $4 trillion of draconian budget cuts a down payment:
A U.S. deficit reduction plan that promises $4 trillion in savings over time would be a "good downpayment" on getting the country's strained public finances under control.
All Hail the Credit Ratings Agencies.