Investing in Bonds Europe: Interest Rate Swaps

Investing in Bonds Europe: Interest Rate Swaps

This is a good primer on interest rate swaps, with the understanding that now banks force counterparties to take a swap. All the banks have taken the low interest bets and take the floating rates and give the counterparties the fixed, higher rate.

This is "protection" sold to the counterparties desperate for loans. Without the loans they can't make payroll or whatever. So they are forced to take the swaps. 

So the banks are on one side of the trade, and Bernanke will follow a slow growth policy, and Europe will follow a no growth policy, to keep this game going. And it could continue for a long, long time, unless some unforseen risk, a black swan, gets in the way. It is unlikely though.

Instead of banks making loans to people, they buy AAA bonds, and take them in as collateral on the interest rate swap bets. They want good collateral in case the counterparties default. The banks generally win and the counterparties pay tribute, the higher rate, if they want the loan in the first place.

The system sucks. But there is no liklihood it will change any time soon.

Europe could find problems with her banks since there may be a shortage of good collateral for these swap trades there even more than in the USA.


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