Confused Yet? CDS, ISDA, Greek Credit Event Explained

March 9th, 2012 by

Tweet and Article by @ChrisAdamsMKTS

Greek Credit Swap Ruling Divides InvestorsOur Take: The ISDA has ruled and the market responds with a “meh….”.  I originally chose Chris’ article as the top story of the day because he has the best explanation of why the markets did not really move today on what one would think, with all the hoopla around Greece, would have been a major market moving event.  After going through the article a bit more however I realized that there are a lot of hidden gem’s for the lay investor on the Situation in Greece.  Here are the highlights:

  • A credit default swap or CDS is basically an insurance policy which pays out when a bond defaults.
  • What actually constitutes a default is not as straightforward as one would think, so there is a committee called the International Swaps and Derivatives Association or ISDA which votes to determine when a “credit event” has actually occurred and therefore when the seller of the Credit Default Swap must pay the buyer (basically making good on the insurance policy).
  • This week Greece forced investors in their bonds to swap out their existing bonds for new bonds which were around half the value of the old bonds.
  • There were a lot of questions this week as to wether or not the ISDA would consider this ” debt swap” a credit event since technically they are still paying bondholders on the new debt.
  • Today the ISDA voted that this was in fact a credit event and that the sellers of the CDS have to pay the buyers.

Article by Derek Heckman on @seekingalpha

What to Do With Overvalued Treasuries - Our Take:  Many articles have pointed out recently that after the spectacular run that Treasuries have had there is not much further they can go.  What Derek points out however that most other people I read have not (one exception is The Financial Lexicon), is that from an investment standpoint, Bonds Should be treated no differently than stocks.  Pick your allocation and then when one asset class rallies vs. another you adjust the allocation automatically paring back on the position as the asset moves into overvalued territory.  Bonds are not different than stocks in that for a long term investor trying to time the market is almost always the wrong move.

Tweet and Article by @EverydayFinance

US Corporations Issuing Debt Like Crazy - Our Take: Corporations are taking advantage of historically low rates to issue more debt in order to grow their businesses.  The Fed has basically created an environment where investment grade corporations can borrow at such a low cost that it would almost be dumb for them not to.  Its also a positive sign for the economy as it means that there is enough opportunity for them to put the cash to work to justify issuing the bonds.

Come across or write an interesting article or idea that should be included in the best of the bond market?  Email it to us at info@learnbonds.com or find us on twitter @learnbonds.

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