The US Gets Riskier

“The bailout of Freddie Mac and Fannie Mae is weakening the balance sheet of the U.S. and that is causing a deterioration of creditworthiness. The market is anticipating there might be more bailouts.” -Mehernosh Engineer

Nothing in life is free… especially the world’s largest bailout.

U.S. Treasury Credit-Default Swaps Increase to Record, CMA Says: “The cost of hedging against losses on Treasuries rose to a record on concern the U.S. government faces higher liabilities because of its rescue of mortgage companies Fannie Mae and Freddie Mac, credit-default swaps show.

Contracts on U.S. government debt increased 3.5 basis points to a record 18, up from 6 basis points in April, according to CMA Datavision prices for five-year credit-default swaps at 5 p.m. in London. Credit-default swaps on German government bonds cost 8 basis points and Japanese bonds 16.5 basis points.

The Treasury committed to invest as much as $200 billion to prevent a collapse of Fannie and Freddie, protecting investors owning more than $5 trillion of their debt and mortgage-backed securities. The U.S. budget deficit will grow next year to $438 billion, the Congressional Budget Office said today, making it harder for President George W. Bush's successor to either cut taxes or increase spending.”

That should make yields start to crawl up and eventually spike. There is a tipping point. Nobody knows where it is, but rest assured, it is out there somewhere.

Lehman (LEH) slammed into $8.00 today. Who knows where it will trade by the close? Another bailout in the making? How much will that cost?