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View Full Version : Investors: The $1 Billion Armageddon Trade Placed Against The United States



Tylerdurden
07-27-2011, 06:30 AM
Jack Barnes: (http://moneymorning.com/2011/07/25/the-1-billion-armageddon-trade-placed-against-the-united-states/) 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.
I believe what happened is a debt-ceiling deal was done in Washington and leaked to a major proprietary trader. Everyone knows the debt negotiations in Washington have been an extreme game of brinksmanship between political parties, but now someone knows how that game played out.
This had the hallmarks of one of the largest bond shops in the world knowing something the rest of the market didn’t.
The number of shops or even central banks that can take on this level of market risk is extremely small. Some that come to mind are hedge fund manager John Paulson, Bill Gross’s PIMCO, and the U.S. and Chinese central banks.
Paulson already scored big – about $6 billion big – on a similar trade years ago when he bet against subprime mortgages, the investments that helped bring down Lehman Bros. and many other investors.
Whoever was behind it wanted a trade on ASAP, and didn’t care about the ripples they would cause.
http://moneymorning.com/images2/BondMarketBombing.jpg
You can see how this trade caused fear to be unleashed in the market once it got out and the implications hit by looking at U.S. Treasuries. People who were long 30-year Treasuries panicked as they saw the huge short put on the futures market, and started to unwind their long exposure.
What you, as investors, should do now is look at the bond exchange-traded funds (ETFs) that provide a positive rate of return when U.S. Treasuries drop in value. Yields are going up sooner rather than later, if the person behind this Armageddon trade is correct.
http://etfdailynews.com/2011/07/25/investors-the-1-billion-armageddon-trade-placed-against-the-united-states/

Andrew Craig-Bennett
07-27-2011, 06:37 AM
It is a sensible hedge if you are the People's Bank of China. It does not necessarily imply that they expect the USA to default - merely that, as the largest holder of Treasuries, they find it prudent to insure against the possibility.

I doubt if anything has leaked from any negotiations. George Soros's legendarty one billion pound bet against Sterling was completely "clean" and done on the advice of some very eminent economists - the one whom I know retired to New Zealand on the cheque that a grateful Soros wrote him.

Tylerdurden
07-27-2011, 06:39 AM
It is a sensible hedge if you are the People's Bank of China.

I doubt if anything has leaked from any negotiations. George Soros's legendarty one billion pound bet against Sterling was completely "clean" and done on the advice of some very eminent economists - the one whom I know retired to New Zealand on the cheque that a grateful Soros wrote him.

Soro's has just closed his fund and sent money back to investors. These clowns know whats coming.

Soros to End Four-Decade Hedge-Fund Career
http://www.bloomberg.com/news/2011-07-26/soros-to-end-four-decades-as-hedge-fund-leader-by-returning-investor-cash.html

Andrew Craig-Bennett
07-27-2011, 06:53 AM
Yes, but that was because (a) he's eighty and (b) he had just made a bad trade which convinced him it was a good moment to stop. he's down to his last twenty six billion, so he might be right. ;)


Seriously I reckon that's a PBOC hedge.

Tylerdurden
07-27-2011, 07:23 AM
Yes, but that was because (a) he's eighty and (b) he had just made a bad trade which convinced him it was a good moment to stop. he's down to his last twenty six billion, so he might be right. ;)


Seriously I reckon that's a PBOC hedge.

I would buy that except for the actions of several other hedge funds. In totality something is up and they know it.

Tylerdurden
07-27-2011, 09:07 AM
Yes, but that was because (a) he's eighty and (b) he had just made a bad trade which convinced him it was a good moment to stop. he's down to his last twenty six billion, so he might be right. ;)


Seriously I reckon that's a PBOC hedge.

I think this may be the reason.

Hedge funds regulation: It's not working out Hedge funds by Stanley Druckenmiller and George Soros would rather push out outside investors than adhere to new rules. Will more hedge funds follow?
http://www.csmonitor.com/Business/Latest-News-Wires/2011/0727/Hedge-funds-regulation-It-s-not-working-out

Paul Pless
07-27-2011, 09:47 AM
he's down to his last twenty six billionbummer

Andrew Craig-Bennett
07-27-2011, 10:01 AM
I think this may be the reason.

Hedge funds regulation: It's not working out Hedge funds by Stanley Druckenmiller and George Soros would rather push out outside investors than adhere to new rules. Will more hedge funds follow?
http://www.csmonitor.com/Business/Latest-News-Wires/2011/0727/Hedge-funds-regulation-It-s-not-working-out



I believe that you are right, and I was mistaken.

Tylerdurden
07-27-2011, 10:13 AM
I believe that you are right, and I was mistaken.

Truly a gentleman Andrew. I hope some of that Character can rub off. :)

peb
07-27-2011, 10:48 AM
The market has made little sense throughout this whole debacle. It would seem that treasuries should be more affected than they have been. The continuing strength in gold prices is the only think that seems to have reflected reality. I can only guess that many bond investors have already diversified somewhat away from treasuries. Perhaps treasuries are not the key driver of overall interest rates anymore. People have determined there are municipals out there which are not that risky. Emerging market soveriegn bonds have been strong, this makes sense to me. Companies like INTC have been doing pretty well lately, who can argue with that as a income investor when comparying to treasuries? At the end of the day, income investors are deciding that there is no longer a safe-haven, and have been diversifying for some time.

If this is the case, it is the early stages; prices are being set based on available yield across other products. Overtime I think we will see risk assessment become a much more key part of the bond market mentality, which will mean much greater credit spreads and spreads that don't always affect ratings.

At this point, the US will loose its AAA rating, regardless of how the debt ceiling debate turns out. And this morning's market I find extremely interesting; I don't like deciding things based on one day's trading; but today is another day where everything seems down, ie no asset seems to be benefing as a safe haven. Worth watching to see if that is a trend.

Just some random thoughts about markets which are somewhat confusing, based on the state of news.

Dutch
07-27-2011, 10:52 AM
I saw a talking head on nightly business report last night explain that all this debt limit crap will be good for US treasuries due to the fact that it will destabilize pretty much everything else including the gold market.

Tylerdurden
07-27-2011, 10:52 AM
The Plunge protection team will lose its funding on the second. Looking at the charts the past couple of weeks they are still quite active so until the manipulation stops there is no way to tell where we really stand.

Tylerdurden
07-27-2011, 10:54 AM
I saw a talking head on nightly business report last night explain that all this debt limit crap will be good for US treasuries due to the fact that it will destabilize pretty much everything else including the gold market.

I pretty much think the first flight will be from equities. Then Mini's, then the bond market. That's my take on it. Meanwhile Norman will look at gold prices and start chewing on his footwear. :)

ljb5
07-27-2011, 11:09 AM
I'm not an expert, but a billion dollars on the bond market doesn't seem like a lot to me. Can someone put that in terms of average daily volume?

I also doubt that it happened "with a single push of a button."

Not sure what the issue is. If the person is right, it'll pay off... if they're wrong, they'll lose money.

Either way, they're betting on the outcome, not influencing it.

Tylerdurden
07-27-2011, 11:40 AM
I'm not an expert, but a billion dollars on the bond market doesn't seem like a lot to me. Can someone put that in terms of average daily volume?

I also doubt that it happened "with a single push of a button."

Not sure what the issue is. If the person is right, it'll pay off... if they're wrong, they'll lose money.

Either way, they're betting on the outcome, not influencing it.

You need to read, It was a billion dollar futures trade. That's a 10 to one bet and it did move the markets because that's how it was spotted.
What is 10 times 850 million ? 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 so in fact it was one purchase. Look into it yourself as it would not be posted all over the financial market forums and blogs if it was an everyday event.

skipper68
07-27-2011, 12:04 PM
The Federal Reserve did it, with the 900 billion it "misplaced" from it's audit. Bankers! Whodathunk....

peb
07-27-2011, 12:16 PM
ljb5, I can't vouch for the original story, but Tylerdurden is right: a billion dollar bet on the futures market is big, very big. And its not just a "touch of the button". An order like that probably takes a while to fill, a whole team of traders may be involved. It is enough to spook the market, and very few institutions could do this, but I think some of the big banks (think JP morgan, which has $121B in tier 1 capital, of which quite a bit would be treasuries.) would have reaason to do this. I would suspect a trade like this is not " a bet where someone thinks they have an edge", but is rather a hedge for treasuries owned by that institution. It could be all at once, because the futures are being rolled over.

Andrew Craig-Bennett
07-27-2011, 12:22 PM
It is certainly a hedge; no-one takes an uncovered position of that size. Which is why I think it is the Peoples Bank of China; they hold the most Treasuries of anyone and this would be a very sensible precaution for them to take.

Tylerdurden
07-27-2011, 12:25 PM
It is certainly a hedge; no-one takes an uncovered position of that size. Which is why I think it is the Peoples Bank of China; they hold the most Treasuries of anyone and this would be a very sensible precaution for them to take.

Actually the Fed holds the most at this point but I would not doubt China one bit.

Waddie
07-27-2011, 12:33 PM
It is certainly a hedge; no-one takes an uncovered position of that size. Which is why I think it is the Peoples Bank of China; they hold the most Treasuries of anyone and this would be a very sensible precaution for them to take.

+1...
no-one takes an uncovered position of that size. That does make Peoples Bank a good guess.

regards,
Waddie

RodSBT
07-27-2011, 01:14 PM
Good stuff Guys.
Thanks for posting Tyler D.

Tylerdurden
08-07-2011, 11:15 AM
Very relevant to whats happening now.

$1 Billion bet in July of US downgrade brings questions of insider information
In late July, a mystery investor or hedge fund made a nearly $1 Billion bet that the US would lose their AAA+ credit rating, and on August 5th when S&P issued its downrade to AA+, that investor now stands to make a return of 1000%, and leads to serious questions of who the mystery trader is, and did they have insider information well before hand.
In 1992, George Soros nearly destroyed the British Pound, and made a profit of $1 Billion by betting agains the currency. The British government had been propping up the Sterling for some time, and this led to a weakness that Soros was able to exploit when rejection of the Maastricht Treaty led to a massive devaulation of the Pound, and a huge profit for his bet.
That belief, or perhaps knowledge of events is very similar to the bet placed against the American credit rating just two weeks ago.

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. – ETF DAILY News (http://etfdailynews.com/2011/07/25/investors-the-1-billion-armageddon-trade-placed-against-the-united-states/)
While the identity of the 'mystery investor' remains unknown, many indicators do point to George Soros as the principal benefactor. First, Soros has been tied to the Obama administration since the 2008 elections. In February of this year in fact, a Soros investment fund profited well on President Obama's new green energy (http://washingtonexaminer.com/blogs/beltway-confidential/2011/02/new-soros-hedge-fun-profiting-obamas-green-energy-push-hires-top-) policies. Secondly, right about the exact same time as the $1 Billion bet took place on the US credit rating downgrade, Soros made public the move to divest (http://luminamoney.com/news/?p=1579)his management fund of outside investors, and quietly go private. This move allows him to make trades and investments without being required to notify the SEC under the new Dodd-Frank act passed in Congress last year.
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Of course, this mystery bet could have been made by any Hedge Fund that followed Soro's course of action, and went private on their own. However, very few people have the inside contacts with the Treasury Department and Obama administration that Soros does, and the historical evidence does point strongly to this bet being one that he has done in the past.
While the point here is not necessarily who made the bet on the a US downgrade, but rather, the question is how much was known by the Obama administration and Treasury Department in advance of a downgrade coming? In April of this year, an interview with Secretary Tim Geithner led him to say unequivocally that there is no chance of the US being downgraded, and assuredly, the government has close communication with the ratings agencies through the Treasury and the Fed. This downgrade did not come as a surprise to the government, only the timing of it may have been unwanted.
(See video to the left of this article for Timothy Geithner interview)
There is a saying when it comes to theft in America. If you steal $100, you go to jail, but if you steal $1 Billion dollars, you work on Wall Street. The SEC and American justice system has been a process that picks and chooses whom it prosecutes for insider information, and the higher up you are in the banking system, the less likely you are to be investigated, or prosecuted. Since the 2008 credit crisis, small fish such as Bernie Madoff were made public scapegoats, and brought to trial, but larger names such as Angelo Mozillo of Countrywide simply got a slap on the wrist, and a large retirement.
The timing of a massive bet of nearly $1 Billion dollars on the US losing its AAA+ rating just two weeks before S&P made the call on August 5th is eerily similar to what took place in 1992 on the British Pound. There is no doubt that someone had insider information that a ratings downgrade was coming, and only time will tell if the mystery investor is ever revealed who just made $10 Billion dollars off the investment.
http://www.examiner.com/finance-examiner-in-national/1-billion-bet-july-of-us-downgrade-brings-questions-of-insider-information

skipper68
08-07-2011, 03:00 PM
Sounds like it was setup, by the S&P's voodoo math to make the profit happen. Why no investigation? Martha Stewart did much less and was convicted. Where's the money trail?
Back to the Billion Dollar Armageddon Wall Street Bet.[$1 Billion bet in July of US downgrade brings questions of insider information.]
In late July, a mystery investor or hedge fund made a nearly $1 Billion bet that the US would lose their AAA+ credit rating, and on August 5th when S&P issued its downrade to AA+, that investor now stands to make a return of 1000%, and leads to serious questions of who the mystery trader is, and did they have insider information well before hand. WELLL, then their is some serious insider trading that happened, with a trail back to the WhiteHouse. [ THEN:$1 Billion bet in July of US downgrade brings questions of insider information] [NowThe timing of a massive bet of nearly $1 Billion dollars on the US losing its AAA+ rating just two weeks before S&P made the call on August 5th is eerily similar to what took place in 1992 on the British Pound. There is no doubt that someone had insider information that a ratings downgrade was coming, and only time will tell if the mystery investor is ever revealed who just made $10 Billion dollars off the investment.]


WHERES THE OUTRAGE? WHERES THE INVESTIGATION??? S&P was IN ON THIS BET.