What? This is from an economist?

Last year, before the crisis exploded, banks and hedge funds had bought up a large amount of Greek debt cheaply, insuring it by purchasing credit default swaps (CDSs). The crisis has enabled banks to make a killing by selling what is now high-yield Greek debt and issuing further CDSs at a huge premium.

Seriously?

Is he actually ignorant of the way that bond prices and bond yields are the inverse of each other?

So, you buy Greek govt debt at 5% yield for 100. Next year the same bond is yielding 8%. Now, it depends upon the maturity of that bond but when you come to sell it you don\’t get 100. You get 95, or 90, or 70 for it.

So, rising yields mean you don\’t make a fortune buying debt cheap and selling dear. They mean that you *lose* a fortune buying debt dear and selling cheap.

I know that SOAS is known as a home for heterodox economists but really, there\’s a difference between heterodoxy and complete divorce from reality.

5 thoughts on “What? This is from an economist?”

  1. I wonder if it’s do with editing. I mean he also has the banks buying CDS in the first instance and issuing them in the second.

  2. There is so much confusion in the article you link to, but in fairness, a lot of folk get themselves into a pickle over bond prices and yields. It helps for folk to understand that yields rise when it is feared that the real value of the debt to be repaid is being eroded by factors such as inflation, rising default risk, etc.

    As for credit default swaps, as you know, when a CDS is bought on a bond or loan, it is the equivalent of that buyer choosing to short-sell the bond. In the corporate bond market, shorting bonds is often difficult to the point of impossibility as many bonds are locked away in the vaults of big pension schemes. The CDS market got some of its impetus from the fact that people in markets needed a way to express a negative view of a bond to insure against a loss.

    Unfortunately, things got a bit out of hand……

  3. “but in fairness, a lot of folk get themselves into a pickle over bond prices and yields”

    JP, you are way too generous. This person is lecturing us about what should be done about something, while not having an earthly clue. No “in fairness” deserved I reckon

    Thanks for the link Tim.

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