In recent months, there have been many articles about Congress and raising the debt ceiling. There were a couple of articles of how institutional investors were approaching this news by taking up positions in derivative securities based on US Treasuries. Hedge funds are trading positions in credit default swaps, trying to predict how and when the debt ceiling situation will be resolved. There are $26.1 billion in gross notional outstanding on May 31st. Most investors do not believe that there will be a default. Trades have been structured where the fund is buying swaps against the shorter term bond and selling swaps against the longer term bond.
The article can be accessed by clicking here.
On the other hand, Bill Gross of PIMCO, has bet against the US Treasury in his Total Return fund by being short interest rate swaps. This means that PIMCO is paying a fixed rate of interest and receiving a floating rate of interest.
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