It has a maturity of about 5 years

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buy canada goose jacket cheap John Carney has been plugging away at what on earth Bruno Iskil, the so called London Whale, might be doing with his reported $100 billion bet on an obscure off the run CDX index. Carney idea is that this is all part of some kind of inflation protection trade, but as Ben Walsh says, if you want to protect against inflation, you just buy TIPS. Corporate credit default swaps aren going to help you out much on that front. buy canada goose jacket cheap

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canadian goose jacket But thinking about it a bit more, Carney CHIPS theory (for Corporate Hedging Inflation Protected Securities) makes a certain amount of sense. Let say that canada goose Iksil, with his $360 billion portfolio, wants to make money in the fixed income markets even as he sees inflation appearing canada goose uk shop over the next 5 years. It never easy for bond investors to make money in the face of inflation, since they receiving a fixed income, and that fixed income is effectively being eroded by inflation. And with rates as low as they are today, investors aren being paid for the inflation risk they taking. canadian goose jacket

buy canada goose jacket Most normal canadian goose jacket investors are faced with a choice: they can canada goose coats on sale either get insanely low yields on TIPS, and protect themselves from inflation, or else they can get slightly higher yields on corporate bonds, but leave themselves open to uk canada goose having their money eroded by inflation. buy canada goose jacket

canada goose black friday sale Iksil, however, might have found a way of managing to have cheap canada goose uk his cake and eat it. He buys TIPS say the 10 year series issued in January 2007, which matures in January 2017. Because those TIPS are now off the run, he gets a slightly higher yield on them. canada goose black friday sale

canada goose coats At the same time, Iksil wants exposure to investment grade corporate credit risk. If you or I had put our money in TIPS, we couldn do that, because, well, our money would be tied up in TIPS. But Iksil works for JP Morgan, so he can get credit risk without having to tie up any money at all. All he needs to do is sell protection on a CDX index which matures at roughly the same time in this case, Series 9 of the Markit CDX North America Investment Grade Index, which matures in September 2017. canada goose coats

Canada Goose Jackets Now the great thing about selling protection, rather than buying bonds, is that it costs you nothing up canada goose clearance front. Quite the opposite, in fact: you get paid for doing it. Iksil is cashing insurance premiums on a basket of corporate debt every six months, and he can add that cashflow to the much more modest cashflow he getting on his TIPS. And because he JP Morgan, even if the canada goose black friday sale market moves against him, he unlikely to have to put up much if any margin. Canada Goose Jackets

canada goose clearance sale Put the TIPS and the CDX trade together into a package, and you get what Carney calls CHIPS, or what Pimco managing director Mihir Worah cals CIPS: Corporate Inflation Linked Securities. (Yeah, I know, that looks more like CILS to me.) canada goose clearance sale

canada goose clearance What happens now if inflation picks up before 2017? For one Canada Goose Outlet thing, Iksil will make money on his TIPS, which go up in value when inflation rises. But Iksil will also make money on his CDX trade. The yield on a canada goose online corporate bond is basically made up of two elements, called credit and rates. The rates part is the bit which goes up when inflation appears. But when you selling credit protection, you stripping out the rates part, and you exposing yourself only to the credit part of the equation. canada goose clearance

Canada Goose Outlet And when inflation appears, corporate credit risk actually goes down, not up. Inflation is bad for lenders; it good for borrowers. And it means, generally speaking, that companies are raising their prices and bringing in more money, in nominal terms. Which uk canada goose outlet means they have a Canada Goose Jackets higher income with which to pay off their fixed debts. Which means that they more likely to be able canada goose clearance sale to pay those debts off in full. Canada Goose Outlet

canada goose deals Indeed, if you look at the rate sensitivity of the index that Iksil is buying, his mark to market P goes up when rates go up. For every basis point that rates rise, Iksil makes a profit, if he has $100 billion of exposure, of roughly $650,000. If yields go up by one percentage point, Iksil has made canada goose factory sale himself $65 million, just on the CDX part of the trade. Which is quite an achievement for a fixed income investor in a rising rates environment. Add in Canada Goose online the profit on Canada Goose Parka his TIPS, and he making even cheap Canada Goose more. canada goose deals

canada goose It a big and risky trade but it not one which he ever necessarily going to have to unwind. It has a maturity of about 5 years, and JP Morgan is more than big enough to hold a 5 year trade to maturity. canada goose

Canada Goose sale But is that really what he doing? There one very good reason to believe it much more complicated than I laid out: if you look at those TIPS maturing Canada Goose Online in 2017, there were only $9 billion of them issued canada goose coats in total. And more generally, what Iksil is doing here is basically replicating the kind of corporate canada goose uk outlet credit exposure that canada goose uk black friday JP Morgan has lots of already. This isn in any way a hedge of JP Morgan existing portfolio; it more of Canada Goose Coats On Sale a doubling down on it. Canada Goose sale

Canada Goose Parka Still, looked at one way, Iksil job is to take the assets that JP Morgan hasn been able to loan out, and get the kind of return on those assets that JP Morgan would buy canada goose jacket cheap be seeing if it had been able to loan them out. So maybe it makes sense that he making a big bet on corporate credit. I just buy canada goose jacket wonder where on earth he could possibly find $100 billion of inflation protection Canada Goose Parka.