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Never A Dull Moment For Bonds Gone Wild
There's rarely a dull moment in the US rates complex these days. If it's fireworks you seek, the long-end of the US Treasury curve is happy to oblige.
As noted here Tuesday, 10-day realized vol on TLT (the long-end Treasury ETF) exceeded 10-day realized vol on the S&P by the most ever this week. The long-end, having lost its anchors, is trading like a penny stock.
The bond selloff extended on Wednesday. For a moment, the situation looked very dicey. 10-year yields were poised to make a ru
H-Man, a confusing market to trade exacerbated with a lack of clarity. Rates up, down or simply sticky. Right now I am going with rates up even with a soft Fed speak. If we bust 5 on the tens then maybe a short on yields makes sense but until then …………….
I seem to recall some studies showing that in the long run rolling over short rates produces better results than buying and holding long bonds.
H-Man, risk free at 5% is a headwind (big time) to equities.
I know the Fed has sterilised its QE bond issuance and obviously there were enormous “profits” from this that were tranferred to UST. My question is how are the losses on QT accounted for as there has to be a mismatch. If anybody can point me to some paper where I can read up on this it would be appreciated.
There’s no “issuance” from the Fed. And QT represents passive rolloff. They’re not crystallizing “losses.” They do incur losses, though, but they’re not really “losses.” They just create a deferred asset that’s equal to whatever the mismatch is between the interest they pay out and their interest income. That deferred asset just sits there. Eventually (hopefully) they’ll return to “profitability” and their retained earnings will reduce that deferred asset to nothing. At that point, and assuming interest income continues to outstrip interest paid, they can start remittances to Treasury again.
John Hussman often focuses on these issues in his Market Comment. I’m not sure if this is what you’re afrer but I believe this Fed chart shows the cumulation of the losses retained by the Fed which won’t be offset until its net interest turns positive again and starts amortizing this balance down. While the effects are largely on paper, it does put pressure on the budget deficit since the Fed is no longer remitting net interest to the Treasury, and will not begin again until this deferral is run all the way back down. At least that is my understanding.
https://fred.stlouisfed.org/series/RESPPLLOPNWW
SportsCenter comparison one of your best. Smiling and laughing at the memories. Thanks!