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Sancho Panza

Bond Losses At Federal Reserve Top $192 Billion

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ETF Guide 2/8/13

'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 Fed’s 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."

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 Reserve’s capital. But that’s not all.

If interest rates continue to head higher, the value of the Fed’s 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.'

Edit:I found the original link here.

The article does make you wonder how successful our own Central bank has been in it's interventions?

Edited by Sancho Panza

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So what? They will just print more.

So accounting.

Our monetary system involves the idea of money as a unit of account. Creating new base money is a balance sheet entry for the Bank of England with no effect on P&L. They can't print profits. Losses erode capital. The central bank cannot publish accounts showing that it is insolvent.

Further accounting contortions will be possible but they are unlikely to reduce gilt yields.

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So accounting.

Our monetary system involves the idea of money as a unit of account. Creating new base money is a balance sheet entry for the Bank of England with no effect on P&L. They can't print profits. Losses erode capital. The central bank cannot publish accounts showing that it is insolvent.

Further accounting contortions will be possible but they are unlikely to reduce gilt yields.

What's to stop them printing money 'off balance sheet', though? Is there some sort of international law governing central banks to stop them from doing this, and if so, could a government introduce temporary legislation, say, to get around it? I guess, in other words, what insists that a central bank's balance sheet must balance? Is this the point where all this QE stuff really blows up - not in the hyperinflation that people predicted but in some other destruction of money that I frankly don't understand, like the central bank posting enormous losses and just ignoring them.

Edited by gimble

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I'm sure the gold in Fort Knox will cover any losses.

Can the Fed act in secret like the BoE?

If no one has been allowed into Fort Knox for 40 years I'm quite certain they'll fudge the books in a way that they haven't made a loss and won't that loss only be realised when they sell on the open market? If they don't sell there is no loss.

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