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Unprecedented Move in the CDS Yield Curve on the Short End

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Today’s comes from Bloomberg, which reports that credit default swaps (CDS) on one-year US Treasuries now cost more than CDS on five-year bonds. This is the first time this has ever happened. It indicates that note holders believe that an agreement on a new debt ceiling will not be agreed and that the US will default on its debt. If that happens, swaps contracts will have to be paid. A ratings downgrade of US debt will surely follow.


While all this is uncharted territory, this chain of events could provide an opportunity for investors in certain kinds of ETFs, while making others less attractive. We’ve looked at several, including the PowerShares DB US Dollar Index Bullish (NYSE: UUP), the PowerShares US Dollar Index Bearish (NYSE: UDN), the CurrencyShares Swiss Franc Trust (NYSE: FXF), the iShares Barclays TIPS Bond (NYSE: TIP), and the PIMCO 1-5 Year US TIPS Index ETF (NYSE: STPZ).


Perhaps an arbitrage play on the ability of the Congressional Duoply to shake hands by midnight Monday?

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