Debt ceiling first responders

Adriene Hill Jul 26, 2011
HTML EMBED:
COPY

Debt ceiling first responders

Adriene Hill Jul 26, 2011
HTML EMBED:
COPY

Kai Ryssdal: Day two of the debt-ceiling-inspired market apocalypse watch ended with more of a whimper than a bang. Stocks we just told you about; yields on the 10-year T-note actually fell just a tad. Not exactly a sign of investor skittishness.

But not all market signals come from prices. Out in Chicago, the CME group — that’s the Chicago Mercantile Exchange — is making life more difficult for traders who want to back their bets in the market with Treasurys.

Marketplace’s Adriene Hill has the why and why it matters.


Adriene Hill: To really understand why this matters, let me explain a bit about futures markets. Basically they allow companies to hedge against price fluctuations and let investors bet on the price of commodities or other valuables, in well, the future.

It goes something like this: a trader wants to buy some futures contracts. To do that, the exchange requires that he insure the purchase.

John Brady: When posting collateral, when posting funds, most accounts post T-Bills.

T-Bills are of course Treasury bills. And the man helping me explain is analyst John Brady from MF Global. He says what the CME group has done, at its simplest, is reduce the purchasing power of Treasury bills, by raising what’s called “the haircut.” No, it has nothing to do with the barbershop. The “haircut” is the percentage the clearinghouse shaves off the top of the value of a Treasury bill.

So now, $1 million in T-Bills will buy fewer futures contracts than it did before.

Brady: It’s another way for the firm to perhaps to kind of cushion itself in case things get out a little bit out of hand in the coming days and coming weeks.

Analyst Phillip Verleger says the raised haircut is a big deal.

Phillip Verleger: And what it does is state that the CME Group views U.S. debt as less valuable.

Less valuable than before the debt ceiling mess. Verleger says it could impact all of us.

Verleger: Marginally, very marginally, it means that the cost of everything will go up.

How? He says if it costs a company like Kellogg’s more to trade in the futures market, those costs could get tacked on to our box of corn flakes.

I’m Adriene Hill for Marketplace.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.