The Carry Trade Is Back - Paulson Style

There is an interesting article by John Berry in Bloomberg that highlights how the US government may be able to profit from what will amount to one giant carry trade. Specifically, the government will need to get the proposed $700 billion bailout funds by selling a range of US Treasuries with yields in the range of 3-4 percent. As we have seen recently, investors are eagerly trying to purchase Treasuries, so the market should be able to absorb the supply without increasing yields to any large degree. Furthermore, even if the trouble assets that are being purchased take haircuts of 50 percent or more, yields should still be in the range of 10 percent or more. The spread on an investment of $700 billion could then generate income up to $40-60 billion annually. Of course, this is all just speculation given that no one really knows yet what assets will be bought, or what price will be paid, but the potential for profiting in a "carry-trade" manner does exist. Optimists go on to state that not only would it generate some positive income, but such income could be used to reduce the budget deficit. Carry-trade profits? Maybe. Using profits to pay down the deficit and debt? Not so sure. As they say, stay tuned.

Update: Nothing like speaking too soon. The Paulson plan went down to defeat this afternoon. I don't imagine this is over.