Jack Barnes: 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.
Here are the 19 reports of police misconduct tracked in our National Police Misconduct News Feed for this Thursday, July 28, 2011:
- 5 Fullerton CA police officers are being investigated after witnesses accused them using of excessive force in the brutal beating and tasering death of a homeless man which was partially recorded on video. This came out a couple days ago but it took me a while to make sure I didn’t already have this one recorded in our database.  http://ow.ly/1v56RP
- Mt Rainier MD police officer who was voted as cop of the year 2 years in a row and who is now facing a number of charges for the attempted murder of man he allegedly tried to rape is now accused of pistol whipping another man in the back seat of a police cruiser and was accused of a similar sexual assault scheme previously as well. In fact the city also settled two brutality suits against him in recent years as well.  http://ow.ly/1v4uOF
- Des Moines IA cop w/questionable history accused of beating handcuffed groom at his own wedding reception  http://ow.ly/1v60wj
- US DEA investigator sentenced to 25yrs prison for grooming then sexually abusing 3 boys between 12-16 years of age and videotaping the acts in the child porn case against him.  http://ow.ly/1v5Pm2
- La Porte County IN deputy arrested on 8 counts possession of child porn after the sheriff asked for a state investigation into that deputy’s suspicious behavior/  http://ow.ly/1v5tac
- Beaumont TX ISD cop arrested on sexual assault charge for allegedly coercing a drunk woman into having sex with him under threat of arrest while he was working an off-duty security gig.  http://ow.ly/1v5t1p
- Berkeley MO cop pleads guilty to statutory rape & sodomy of a 15-year-old girl he knew from a church youth group he helped out with.  http://ow.ly/1v5sJL
- Miami-Dade FL cop accused of calling man a “fucking immigrant” before arresting him for driving a stolen car that wasn’t stolen  http://ow.ly/1v50gv
- Calgary AB cop convicted on common assault charge for punching drunk driving suspect who grabbed breathalyzer  http://ow.ly/1v5UHK
- New York NY police detective suspended after punching lieuteant in face during argument over ticket fixing scandal  http://ow.ly/1v5FlB
- Winnfield LA police chief sentenced to 6mo for obstructing federal agents trying to arrest fugitive by inciting a mob against the agents  http://ow.ly/1v5W5r
- Dallas TX police forced by judge to rehire cop fired for history of violence, chief vows to keep him off streets  http://ow.ly/1v5tke
- Cedar Rapids IA cop arrested on burglary charge for allegedly illegally entering a home and taking two dogs  http://ow.ly/1v58iJ
- Denver CO police ordered by judge to stop delaying & release every excessive force complaint record for last 8yrs that were requested by a lawyer.  http://ow.ly/1v4MkB
- College Park GA cop fired after admitting to hanging out & doing drugs with members of biker club  http://ow.ly/1v5r5b
- College Park GA cop arrested for damaging police cruisers by kicking them in angry fit about administration  http://ow.ly/1v5r5b
- Keokuk Co IA sheriff arrested on drunk driving charge during traffic stop, had 2008 boating while drunk conviction  http://ow.ly/1v5owt
- Vineland NJ cop who crashed into car, pole & house while drunk off duty suspended until he gets license back in 7mo  http://ow.ly/1v4yXF
- Seymour IN cop arrested on drunk driving charge after sideswiping parked car while towing a DARE trailer. If anyone has a picture of this crash, I’d like to have it.  http://ow.ly/1v5oYu
That’s it for today, stay safe out there!