United States Treasury Swap Spreads

by William Edstrom 

In October 2008, something happened that had never happened before. The United States (US) Treasury 30 year bond interest rate swap spread went negative, below the interest rates being paid on US Treasury 30 year bonds. 

The wall street "algos" (computer algorithms) hadn't been programmed for that because it was considered to be like a law of nature that US Treasury bond swap spreads could never be lower than the actual interest rates being paid by US Treasury bonds.  

Unless. The US government would soon be either bankrupt or no longer in existence. 

Beginning in the Fall of 2008, the consensus of bankers and hedge fund vultures came to be that the US government will be bankrupt before 2039 or no longer in existence sometime before the year 2039. An interest rate swap spread is the difference in swapping floating rate (variable rate) interest to a fixed rate of interest. Interest swap spreads are similar to credit default swap spreads, which are easier for many people to understand first before understanding interest swaps. 

A credit default swap (CDS) is one type of financial derivative, like an insurance policy, that if a bond defaults then the buyer of the credit default swap will be paid for the value of that bond by the seller of the credit default swap (e.g. Goldman Sachs or JP Morgan). This Fall 2015, for example, Glencore swap spreads have gone as high as 7.57%, on Glencore bonds. On a particular $1,000 Glencore bond paying 12% interest, for example, anyone can pay a 7.57% premium (i.e. a $75.70 credit default swap premium payment on that $1,000 Glencore bond) to insure that if Glencore defaults on that $1,000 bond that the CDS purchaser will then be paid $1,000 in money for the $1,000 bond that Glencore defaults on. 

As if derivatives aren't complex enough, a credit default swap buyer does not have to actually have a $1,000 Glencore bond to pay a $75.70 credit default swap premium on that $1,000 Glencore bond; that $75.70 credit default swap premium payment is essentially a $75.70 bet that Glencore will default and that the person who bet $75.70 on a Glencore bond credit default swap will then win $1,000 in money when Glencore defaults. 

A positive 7.57% spread makes sense. Any positive swap spread number makes sense.

There can be hundreds of credit default swaps sold on the same $1,000 Glencore bond leading to potential liabilities in the hundreds of thousands of dollars for each $1,000 Glencore bond. There is a limitless number of credit default swap bets that can be placed on the same $1,000 corporate bond just as there is a limitless number of credit default swap bets that can be placed on the same $10,000 US Treasury bond. 

There are $630 trillion in outstanding derivatives globally according to the Bank of International Settlements (BIS) in Switzerland. That is, about $630 trillion in bets placed on about $100 trillion in stocks and bonds. An analogy, to the large amount of bets placed on a smaller amount of stocks and bonds, is the St. Louis Fed data that $60 trillion in claims exist for US dollars against $12 trillion in actual US dollars in circulation globally.

Fractional banking, for example, where $5 is lent for every $1 in actual money assumes that there will never be more than 20% of the people asking for their money back at once. When more than 20% of the people do demand their money back, like a quick bank run or a slower silent run, there is a financial collapse.

Glencore, with $30 billion in debt (mainly bonds) and over $5 trillion in outstanding derivatives, is currently on the short list of corporations most likely to be the AIG this financial collapse around in the USA. Buyers of Glencore derivatives are concentrated mostly in the USA and Western Europe. American Insurance Group (AIG) derivatives gone bad in 2008 and Lehman Brothers derivatives gone bad in 2008 were the sparks that sparked the 2008 financial collapse in the USA. 

JP Morgan Stanley also looks at US Treasury bond swap spreads from a perspective of LIBOR rate minus the US Treasury bond yield. LIBOR is London InterBank Offered Rate, a central interest rate from which other interest rates are set. A financially stable government hence has a positive swap spread number indicating it is more stable than, for example, LIBOR derived interest rates set for junk bond corporations or junk bond rated states, like The Ukraine, indicate. Negative numbers for US Treasury bond interest swap spreads are flashing red lights indicating a soon to be bankrupt (or non-existent) US government.  

In September 2015, the US Treasury 10 year bond swap spread went negative, becoming lower than the actual yield of the US Treasury 10 year bond. The consensus of bankers and hedge fund vultures is now that the US government will be either bankrupt (unable to pay it's bills and unable to borrow any more money) by 2025 or the US government will no longer be in existence by the year 2025. 

The 5 year US Treasury bond interest rate swap spread is still hovering just above 0 as are interest rates for the 5 year US Treasury bond. Extrapolating the lines downward of both the 5 year US Treasury bond swap spread and the 10 year US Treasury bond swap spread yields a date more precise than 'by the year 2025.' 

According to current US Treasury bond interest swap spreads data, the US government will either be A) bankrupt by the end of 2023 or B) the US government will no longer be in existence by the end of 2023. The government in the USA has too much debt, $46 trillion, a whooping 312% US government debt to GDP ratio, making a sovereign debt collapse an imminent event in the USA. Greece experienced a sovereign debt collapse when it's government debt to GDP reached 125%. The US government will become bankrupt (or no longer in existence) because it borrowed too much money. 

Inherent in the figures and timeline are probable events in the immediate future in the USA such as short-term deflation and more "quantitative easing" (i.e. the US Treasury printing trillions of more dollars out of thin air) followed by hyper-inflation and a worthless US dollar.  

Many wall street people routinely talk about US Treasury bond interest swap spreads having gone below actual US Treasury bond yields, what that means and what they plan to do (e.g. evacuate, take their Gulfstream jets with their second passports to their villas and penthouses in other countries); but the corporate media in the USA (i.e. the 6 corporations who own 90% of the media in the USA and the other large corporations who own another 9% of the media in the USA) has been silent about US Treasury swap spreads going below actual US Treasury bond yields ("going negative") and what that means. 

More importantly, world leaders and other important decision makers need to plan for a probable contingency that by New Year's Eve 2023, there will be a bankrupt US government. Or no more US government. The weapons stockpile (e.g. nuclear, chemical and biological) that exists in the USA makes good planning for this probable contingency a compelling imperative for the human race. 

William Edstrom