The MSM NEVER discusses the basic fundamentals of finance; which, if they did, would demonstrate EXACTLY how dire the GLOBAL FINANCIAL SYSTEM’s outlook is. One such basic concept is “duration” – the ‘average yield-to-maturity’ of a fixed income portfolio; or, in layman’s terms, years to maturity.
The more years one is exposed to a FIXED coupon, the more their vulnerability to INFLATION. Thus, long-term – HIGH DURATION – bonds tend to be far more volatile than short-term – LOW DURATION – bonds; and hence, dramatically more dangerous.
Central bank monetary policy – i.e. MONEY PRINTING – has historically focused on the “short-end” of the market; as during “normal times,” long-term rates tend to follow short-term rates dictated by the Fed, ECB, and other central planners. When the Fed executes ZIRP, for example (Zero Interest Rate Policy), it buys short-term bonds and T-bills via Open Market Operations. FYII, ZIRP refers solely to the short-term “Fed Funds Rate”; available ONLY to TBTF banks.
However, DESPERATE times call for DESPERATE measures; and today’s GLOBAL FINANCIAL and ECONOMIC COLLAPSE certainly qualifies as such…
Fed Injects Record $100 Billion Cash into Foreign Banks Operating In the US in Past Week
Consequently, Central banks are starting to break the ultimate taboo of Central banking; that is, “throwing caution to the wind” by increasing the duration of their bond portfolios; in other words, buying LONGER-TERM bonds…
BOJ’s Kuroda signals targeting longer-dated JGBs
With so many financial markets collapsing, Central banks can no longer hold long-term rates down “via association” through daily Open Market Operations. They’ll never tell you the real reason for this conundrum; but it doesn’t take a rocket scientist to realize long-term rates are rising due to accelerating INFLATION EXPECTATIONS. Thus far, the ECB has yet to join the “DURATION TRAP” party (at least, overtly)…
Draghi Comfortable with ECB Buying Bonds Up To 3 years duration – September 2012
…but it shortly will – as doing “whatever it takes” to save a crumbling union will require far more MONEY PRINTING than the €1.8 trillion “digitized” since 2008’s Global Meltdown I…
Ironically, no Central bank has come close to the level of duration extension of the U.S. Federal Reserve; via various “QE” operations Helicopter Ben recently deemed “enhance thy neighbor” policies (yes, he really said that).
The “Operation Twist” program of 2011-12 did EXACTLY that; in selling short-term bonds to fund purchases of long-term securities. Of course, as its ZIRP policy necessitates simultaneous purchases of short-term bonds, the whole concept of “twisting” was a farce to start with. Irrespective, the Fed dramatically increased its holdings of long-term Treasury (and mortgage) bonds via the program…
Operation Twist (2011)
The Federal Open Market Committee concluded its September 21, 2011 by announcing the implementation of Operation Twist. This is a plan to purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years, thereby extending the average maturity of the Fed’s own portfolio. Further, on June 20, 2012 the Federal Open Market Committee announced an extension to the Twist program by adding an additional $267 billion, thereby extending it throughout 2012.
…subsequently, “going for broke” when it announced “QE4” in December 2012; i.e., open-ended monthly purchases of long-date Treasury bonds…
Quantitative Easing 4 (QE4)
The Federal Open Market Committee voted to order a fourth round of quantitative easing (QE4) on December 12, 2012. This round authorized up to $40 billion worth of agency mortgage-backed securities per month, and $45 billion worth of longer-term Treasury securities.
Thus, not only is the nation at risk of BANKRUPTCY if interest rates move up even a tiny bit…
U.S. National Debt Clock
…but so is the Fed itself; particularly as it is currently leveraged by a factor of 50, with just $65 billion of “equity” carrying a $3,000+ billion bond portfolio…
Thus, to those believing the Fed could actually “end QE,” – and thus, allow interest rates to rise – ask yourself this? Do you really think they’d put a BULLET in their OWN HEAD?
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