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Posted by Admin Posted on Feb 03 2011

Three stories I can't reconcile.

1. The Wall Street Journal reports a 12% uptick in deriviatives hedging against default on US Treasury Securities. At the same time, the premium investors pay for a credit default swap on a Treasury Security has increased 25%.  Although US Treaury Securities still havea AAA rating, financial information company Markit says the conditions in the CDS market are more commonly associated with AA rated securities.

2. Also in The Wall Street Journal, the Treasury Department announced the U.S. won't hit the debt ceiling until April or May.  Earlier estimates had the US reaching the debt ceiling by the end of March. Opposition to raising the debt ceiling from Tea Party Republicans in Congress raised questions about whether the US would default on its debt.

3.  And The Wall Street Journal also reports that Wall Street bankers are encouraging the Treasury Department to "lock in current low rates" by issuing "ultra-lomg term" Notes.  Currently, the longest term Treasury Note is 30 years, and the bankers are suggesting 40, 50 and even "century notes" for 100 years.  The bankers noted recent sales of 100 year notes by the Mexican government, and 50 year notes by Goldman Sachs (one of the firms pushing the idea).  The Treasury Department shot down the idea of 100 year notes, but stayed open to longer maturities.  While the longer maturity locking in current rates has obvious advantages to the government, the political risk of passing debt down three generations has obvious political risk in the current environment.

Got any ideas?