The Reaction to Geithner’s Rescue Plan

Over the last few days there has been plenty of press about how and why Geithner’s annoucement of the rescue plan on Tuesday spooked the markets. The Dow ended the day down -4.6%, financials were down somewhere around -10%.

That’s the equity side of things.  Corporate bonds suffered, too, on Tuesday as money flowed back to the perceived safety of Treasuries – but at least CDS showed no knee-jerk reaction to the Geithner plan: they did widen, but not materially.  A silver lining?

CDS on Select Banks (US & Intl) through February 13, 2009

Just for Fun – US Credit Default Swaps

As the title says, this one is just for fun: a chart of the price of CDS on 10 year US Treasuries from April 2008 through January 27.  The CDS priced at 68 bps today, after having hit a record high of  75 bps in the first week of December.  According to FT Alphaville, the same contract trades around 2 (!) bps points in normal times.  I should mention that the concept of CDS on US sovereign debt is somewhat flawed in my opinion (Who buys these things? Do people really think their counterparty will be around to honor the CDS if the US defaults? Isn’t the market too thinly traded for prices to be meaningful?), but their development is still interesting to watch.  The chart below includes annotations on a few major Wall Street and Main Street events.

If you’re interested in commentary, I recommend the recent pieces by Greg Ip, Dean Baker and Felix Salmon for further reading.  And if you have any thoughts on how sensible or flawed the notion of CDS on US Treasuries is, post a comment and let us know!