Risk avalanche = higher yields
Wednesday, April 29th, 2009
But these bailouts are hugely risky — as reflected in the high cost of insuring government debt. Credit Derivatives Research’s government-risk index, which measures credit-default swap premiums on seven large sovereign borrowers including the U.S., U.K. and Japan, continued to rise this year even as the VIX fell. It currently stands at 75 compared to a pre-boom level of around 3 and implies a VIX in the 60s, according to CDR.
Though the Fed has been buying hundreds of billions in Treasuries and corporate bonds to keep a lid on rates, the government’s skyrocketing debt sales to fund the deficit, the gradual erosion of the foreign appetite for US debt and the fear that the Fed’s bond buying will itself eventually fuel inflation, make it inevitable that 30-year t-bond yields, currently at 4%, will be far higher in coming months and years.