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Bond Losses at Federal Reserve Top $192 Billion

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Ron DeLegge, Editor
August 2, 2013

The yield on 10-year U.S. Treasuries (^TNX) has surged 66% over the past three months. And bond investors, especially those with jumbo-sized positions, are getting hammered. How much money has the Federal Reserve lost?

At the end of July, the Federal Reserve held $1.98 trillion in U.S. Treasuries. (See chart below) That figure represents just over half of the Fed's $3.6 trillion balance sheet.

Scott Minerd, the Global Chief Investment Officer at Guggenheim Partners notes: 

"Our estimate shows that the spike in bond yields since the first quarter of this year has caused a mark-to-market loss of $192 billion on the Fedís holding assets, equivalent to approximately all of the unrealized gains that the Fed had accumulated since it began to implement quantitative easing in late 2008. Although in keeping with their own accounting principles the Fed does not record mark-to-market losses, a continued increase in bond yields would incur actual losses should the central bank decide to sell assets."




Investments benefiting from rising rates are leveraged short Treasury ETFs like the ProShares UltraShort US Treasury 20+ Bond ETF (NYSEARCA:TBT) and the Direxion Shares US Treasury 20+ 3x Bear Shares (NYSEARCA:TMV). Both ETFs have jumped between 30% to 50% over the past three months. Not bad when considering the total U.S. bond market (NYSEARCA:AGG) has lost 2.83% while long-term U.S. Treasuries have fallen an even harder 11% year-to-date.

AUDIO: ďThe Lance Armstrong of the Investment BusinessĒ
 
Granted, the Bernanke & Co. does not value its massive bond portfolio on a mark-to-market basis. But the surge in interest rates has already erased almost $200 billion in the Federal Reserveís capital. But thatís not all.

If interest rates continue to head higher, the value of the Fedís liquid assets that it could sell would decline and further undermine its capital cushion. And if the velocity of rate increases intensifies, the Fed, with only $62 billion in capital, could see its entire capital base completely wiped out.

This could have a serious domino effect. It could paralyze the Fedís ability to defend the dollarís purchasing power, causing Treasury prices (NYSEARCA:TLT) to fall further and thereby push interest rates even higher. Just imagine the unimaginable; a weakened and impotent Fed.

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CommentsAdd Comment

Eric Gameon said on November 14, 2013
  To address waiting for the balloon to pop comment I would like to point out that the government is actually letting the air out of that bubble you thing that is being created. Another issue at hand it the tax that is being levied through the fiat money system. The thing I like about this process is that no one can buy their way out of it. There are no loop holes for the rich to circumvent this tax. We all are going to pay for the privilege of being United States Citizens. Another interesting fact is that it is not just the American people who are going to be taxed. Any one holding American debt, money, or other interests are going to be taxed as well.
 
 
Ron the Editor said on September 18, 2013
  Chris,

$200B in paper losses is sensationalism? Here's the real deal: If rates keep rising at the same fierce velocity as they have over the past year the Fed WILL BE forced to realize those losses as its capital base dries up.

Holding bonds to maturity is a neat excuse that sounds good in theory. But in the real life world of rising rates, over-indebtedness, and lack of confidence in the creditworthiness of the U.S. Treasury - we've got the perfect storm.

The Fed's exit strategy is not nearly as convenient or easy as you make it seem.

P.S. Up until now the Fed has been relatively successful at manipulating interest rates, but the past isn't prologue. It never is.
 
 
Chris said on September 16, 2013
  The loss your claiming is just sensationalism... You don't incur a loss on assets until you actually sale. You only care about the "value" of an asset if you care about selling. The Federal Reserve doesn't care about the losses, just like most retirees who had bought Fixed interest rate securities like Treasuries and bonds don't care either, because they aren't planning on selling. Your car drops in value the first day off the lot, but no one cares because usually you don't sell it.

Everyone is so concerned about the Federal Reserve Exit strategy, but its simple: They won't sell anything, unless they absolutely need to sell to maintain a stable market. By the time the Federal Reserve actually stops buying assets most of the short term assets they own will be matured and off the balance sheet.

Meanwhile this has helped reduce Federal Deficits by 92 billion (last year) and will continue to increase as they buy more assets because they return all Interest earned to the US government. This helps maintain inflation at our very low rate.
 
 
Ron the Editor said on August 13, 2013
  Hi Steven,

All the ETF ticker symbols in this article are listed in brackets, with their stock exchange listing, and the ticker right after. For example, the ProShares UltraShort US Treasury 20+ Bond ETF (NYSEARCA:TBT). In this example, "TBT" is the ticker symbol.

Hope that helps.
 
 
steven keats said on August 13, 2013
  Cant find the symbols of above ETFS.Please advise.Thank you,
 
 
BernanQE said on August 07, 2013
  What about all the mortgage backed securities the Fed owns? What about them? Can't can play games with the value of these assets too just like we do with Treasuries?

At the Fed, we are in innovative institution. In fact, we invented Mark-to-Fantasy accounting, not MCI WorldCon, not Tyco, not Enron, not Bernie Madoff, and not Alex Rodriguez. You see, the corporate world is just ape-ing us.

Anyway, I'll be retired in 5 more months and the next scumbag can worry about my mess. My next job will be consulting and it will pay me quadruple what I made at the Fed.

If Alan GreenSCAMMER can get $100,000 per speech....how much do you think Ben BernanQE can rake in?
I don't need no stinkin' talent agent!
 
 
Uncle Bob said on August 07, 2013
  The FED can hold Treasuries indefinitely. If they go to sell the Treasuries they hold, there would be huge trouble. There's trouble enough when the stock market sounds the "dive' claxon with the mere mention of the Fed reducing their Treasury purchases. Additionally, what about all of the mortgage backed secuities the Fed bought and continues to buy. Seems like there should be one hell of a lot of money looking for a home: and so the stock market flies upward. All of the stimulus is like buying ether and oil additives when the motor needs an overhaul. The US has lost half of its manufacturing base in the past 30 years, and so like anything that lost a chunk of its backbone, the US economy crawls ....and will continue to crawl. The late 2008 crash was a mere warm up. The US is headed for a doctorate from the school of hard knocks.
 
 
citizen60 said on August 06, 2013
  Would you worry about losses if you could legally create trillions of dollars via nothing more than accounting entries with none of those dollars being a promise of anything from you, or anyone else for that matter (literally IOUnothings)? Give me the right to log onto my bank account and legally add zero's and it's party time!! No need to actually be productive.
 
 
Ron said on August 06, 2013
  MichaelD; All correct EXCEPT the FED does NOT "return the money" (paid by the government for the loans it borrowed from the FED) back to the government! FOOL!
 
 
Ben said on August 05, 2013
  What I find interesting is people confusing assets and commodities. An "asset" is something that makes you money. EG: profitable stocks, cash-flowing real estate rentals, etc. A commodity is something that is bought largely on speculation but itself doesn't change over time. EG: Gold, silver, steel, etc. Generally speaking, a home or a car isn't an asset unless it's actually cheaper than the only reasonable alternative.

I ride my bike to work, because my car is an expense twice: A) the cost of driving it, and B) the increased medical costs that come with lack of exercise, and C) the additional time/financial investment to offset B by buying a sports club membership.
 
 
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