Bank of America issues `bond crash' alert on Fed tightening fears

[NCR85]

Re: Bank of America issues `bond crash' alert on Fed tightening fears

EJ what is your perspective on Wall Street's tendency to pitch the flight out of bonds as a bullish story under the label of a "great rotation"? It seems to me that a bond "flight" can happen in a number of ways:

- spontaneous quantity- (rather than price-) expansion on the part of the domestic private sector; people getting put back to work, etc, output gap closing in the positive direction (imo, won't happen without major growth of private debt)
- output gap closing in the negative direction (falling potential output) due to hysteresis, iatrogenic damage and endogenous supply shocks (would involve a move from bonds to stocks, but this only nets out the otherwise negative trend)
- flight out of the ENTIRE domestic economy due to newly exposed structural problems

My guess is we're not looking at the first of these three and yet this is what is implied in a lot of the stories coming from Wall Street analysts.

[charliebrown]

Re: Bank of America issues `bond crash' alert on Fed tightening fears

One poster at zh, asked the question why does the fed have to pay banks to hold reserves at the fed?
I assume the fed could even charge banks to hold reserves at the fed.

I assume this would make the banks more willing to lend it out, but to whom? It's better to get zero percent (a return of your money), rather than have borrowers default.

Also the ZH article failed to mention tha the D-rate will decrease because as bonds mature in the fed portfolio, they are likely to be replaced by lower yielding ones.

I still don't understand what happens when the fed "loses" money. I guess this means the interest they receive does not make up for the capital losses on their assets.
I know the fed can always make more money, but what about the treasury not getting any money returned. What does that do to the confidence in the system?

[cobben]

Re: Bank of America issues `bond crash' alert on Fed tightening fears

One poster at zh, asked the question why does the fed have to pay banks to hold reserves at the fed?
I assume the fed could even charge banks to hold reserves at the fed.

Sure, both the Swedish and the Danish CBs have done that I recall off-hand.

That the Fed pays the banks is just another subsidy, corruption. According the the article the trend in this is not sustainable past a few years out, which means at some point it will have to stop or (if Sibleau is correct) the system will implode in hyperinflation. What actually happens should be very interesting to watch, personally I have no clue.