My Leitner-Esque Moment

In the coming years, I could easily envision a situation where stronger rated corporate credit curves trade through sovereign curves. I know that seems crazy, but don’t forget negative swap rates and absolute yields below zero were also theoretically impossible. Leitner would probably counsel us to expect the unexpected.

Putting it all together

With market participants leaning heavily short corporate credit, the chances of a big accident diminish. Crises always occur in something that just “can’t happen.” Whether it is home prices can’t fall at a national level or the internet has changed the nature of investing, as Mark Twain reminds us, there is always something that everyone knows for sure that just ain’t so.

I find it funny that the most vocal critics about the spiralling upward out-of-control government debt are often those investors most likely advocating positions in long-dated sovereign bonds as a place to hide. The surprise of this cycle will be that risk-free sovereign bonds provide no safety against the next crisis, but will instead themselves be the source of the instability. Think about hedging against the unthinkable happening. That’s what Jim would do.

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Gary Anderson 11 months ago Contributor's comment

Fascinating article. I doubt if one would see this inversion of rates happening in a derivatives clearinghouse. Corporates are subject to haircuts. What would it take for clearinghouses to give haircuts to sovereign bonds and not to corporates? Seems kind of lunaticish. But it is interesting to think about.