You are right, of course, T-bonds sold off a bit.
I was talking about the basic LTCM model, the convergence of
yields. It does seem nothing else matters at this point.
Nobody really knows what the OTC positions are, who holds them,
who are the counterparties. 400 Trillion dollars is a notional
number, the bulk of it is interest rates swaps. Derivative pros
argue, notional does not matter, cause in swaps only cash flow
from rates is exchanged. They also argue only VAR matters, and
that's small. Well, it's the VAR that blew
up due to increased currency volativity. Then, as leverage
unwinds, someone is forced into some action.
As someone blows up, the whole notional (in some derivatives,
such as credit derivatives) starts to matter.
The same thing goes on with stocks - computers sell volativity
for income. Then VAR blows up and stocks will crash unless the
Fed injects liquidity, which they always do. The whole purpose
is to protect. Ironically, as they protect this systemic model
with rate cuts, the very same model will sell the dollar. |
