All In Against AAA

Read this one slowly, because they’re not going to be talking about it on the evening news — and it’s important:

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.


Lots of people suspected the downgrade was coming. The White House was said to be “preparing” for the move as early as Thursday night. But someone was confident enough — and liquid enough — to place a billion-dollar bet on it.

That should narrow down the usual suspects, yes?

(Hat tip to… I lost the email, sorry.)

UPDATE: Charlie Martin’s comment deserves space here on the main post.

Mmm. My buddy and occasional source “Melinda Romanoff”, who is a professional trader and a principal in a trading firm, had this to say:

That futures story was written by someone with less than rudimentary knowledge of the futures markets.

For example, the reporting of overnight block trades, as these were, show NO direction to the trades, i.e. Bought, or Sold. So there is no legal way to see what transpired, unless you were personally involved in the trade. In this case. it’s more than unlikely.

Silly stuff like this gets recycled every news story in some form. So, don’t get your derivatives news from anywhere except from your own trusted sources, WSJ, IBD, Bloomberg, et. al. Or me, of course, because I used to trade these.

Well OK then. This is why I never touched derivatives.

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