When Markets Break

How do you know that markets are broken? Sometimes it’s the presence of a clean arbitrage like that in Thomson Reuters shares. But there’s a much bigger weirdness going on right now: as John Carney reports, the spread on long-dated agency debt hit 215bp today. Which is roughly the same as the spread on Tunisian bonds, and is actually wider than where Panama is trading. And that’s after Hank Paulson came out and made explicit what everybody knew to be the case all along — that there’s no conceivable way that the US government is going to allow the agencies to default on their senior debt.

On the other hand, sometimes you know the markets are broken because Fortress has bought a 16 billion of your lovingly-crafted triple-A CDO tranches at between 10 and 12 cents on the dollar.

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