Falling treasuries to bring more banks down
By Daniel at 31 October, 2009, 8:32 pm
Recall how the US banks bolstered their balance sheets by swapping the putrid toxic mortgage backed debt for US treasuries? It seemed like a bad idea at the time, but now it seems like a disaster. It looks quite possible that the price of the Treasuries could head south quite dramatically, taking the banks’ capital positions down there with it. Aside from seeing more insolvent banks, the real problem is that this would reduce credit flow to business, risking a double dip recession.
The Fed has been propping up the wobbly-looking US treasury-market by purchasing over $750 billion of Treasuries so far. The problem now is that the Fed plans to stop its shopping spree at the end of the month, taking away a substantial amount of support for the price. Don’t forget the Chinese are losing their appetite for the stuff as well. If both parties were to stop buying bonds then prices would fall fast.
John Paulson, the owner of hedge fund Paulson and Co has made billions from successfully shorting the US housing market and the UK banks. He has a good eye for something that is about to implode. He told Bloomberg that, “shorting long-term US debt is the only attractive bet going at the moment”.
- Poldark
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