$600 billion in losses, Fed crazy?

The market has recently heard news of “huge losses” from the Fed.

The Fed’s latest quarterly financial report shows that the Fed’s holdings of Treasury and mortgage-backed securities fell by $330bn in Market Value at the end of March 2022 as it was hit by its own rate hikes and by inflation.

In civilian terms, the Fed lost $330 billion in the first quarter of 2022.

At face value, the Fed held $5.7 trillion of Treasuries and $2.6 trillion of MBS at the end of 2021. Today, it still holds $5.8 trillion of Treasuries and $2.7 trillion of MBS, roughly unchanged from the end of 2021.

The difference is that the market price of the $8.5 trillion in bonds has changed dramatically

As inflation continues to rise in the United States and the Fed itself raises interest rates, market prices for these bonds are significantly lower than they were at the end of 2021.

The table below shows the Fed’s major bond holdings as of June 16.

We can see that the Fed currently holds:

Treasury bills $0.33 trillion;

Medium – and long-term national debt of $4.97 trillion;

$0.38 trillion in Treasury inflation-protected securities;

$2.72 trillion in mortgage-backed securities

Take the US 10-year Treasury note for example. At the end of 2021, the 10-year Treasury note yield is 1.5% and the Treasury futures price is $130. Today, yields are up to 3.3% and prices are down to 116, a drop of more than 10%…

What does that mean?

Today the market price of the Fed’s holdings of medium – and long-term Treasuries is at least $400 billion lower than at the end of 2021.

(Note: Some of the Fed’s holdings of medium – to long-term Treasuries, which include 10 -, 20 – and 30-year notes, may be nearing maturity — the average maturity of all its holdings is estimated to be around eight years.)

In addition, the price of MBS securities has fallen by about $170 billion since the end of 2021 because of higher market interest rates.

Add in losses on Treasury bills and inflation-protected securities, and the Fed may have lost as much as $600 billion on paper since the end of 2021!

What does $600 billion mean?

According to the GDP of 2020, no more than 20 countries will have an economy of more than 600 billion U.S. dollars. Even if the population of a country exceeds 100 million, its GDP will be less than 600 billion U.S. dollars

Pakistan, population 220 million, economy 260 billion dollars;

Nigeria, with 210 million people and a $430 billion economy;

Bangladesh, with 170 million people and a $320 billion economy;

Ethiopia, with 120 million people and a $110 billion economy;

The Philippines, with a population of 110 million, has an economy of $360 billion;

Egypt, with 100 million people and a $370 billion economy;

A Federal Reserve, just half a year of “losses”, can be worth several hundred million people in other countries work a year –

It gives you a glimpse of how wide the gap between rich and poor is in the world.

And yet, even in the first quarter, when losses were staggering, the Fed still sent $32.2 billion in profits to the U.S. Treasury!

This, this, this the hell is going on?

The answer is simple

1) The Fed’s $600 billion loss, which is just a paper loss, is fine;

2) The profits the Fed makes are real cash profits that it has no problem handing over.

These two questions, in fact, are linked.

So first of all, how does the Fed print dollars?

You buy Treasuries or MBS from the market, and then new dollars are printed and given to the banking institutions that sell the bonds to the Federal Reserve, and then you have an extra dollar in the market.

From the beginning of January 2020 to the end of December 2021, the Fed’s balance sheet skyrocketed from $4.2 trillion to $8.8 trillion at the end of 2021, largely through purchases of Treasuries and MBS.

The Fed’s buying spree has driven up the price of Treasuries and MBS, with 10-year Treasury futures trading as high as $140 in the first half of 2020. The Fed’s purchases have continued to drive down yields on Treasuries and bonds across the market, which at their peak had pushed yields down to a centuries-old low of 1%.

But for better or worse, the dollar bond market does not have negative interest rates.

In other words, two years ago, the Fed bought a 10-year Treasury at the market price of $140, today the market price is only $116, so it looks like the Fed lost $24 on paper, but if it’s denominated in nominal dollars, whether it’s a 1% coupon or a 2% coupon, the Fed at a fixed time, They receive interest paid by the Treasury at a coupon rate, which constitutes a “profit” for the Federal Reserve.

As long as the Fed does not sell the bonds it buys into the market, it is impossible for the Fed to make a real nominal loss by waiting for the bonds to mature, denominated in nominal dollars.

In fact, the Fed does not sell its own bonds, and even if the Fed starts to pretend to shrink its balance sheet in June 2022, it will wait for the bonds to mature and not renew them, rather than sell them.

Now you understand that the so-called “loss of $600 billion” has little effect on the Fed’s monetary policy.

But I should point out that there is no love for any reason, and there is no loss for any reason. In financial markets, losses and gains must be relative. When the Federal Reserve loses an extra $600 billion, of course someone makes money!

Who made the money?

The same people who sell bonds like crazy in 2020-2021!

If you think about it further, all the Treasuries sold in the market ultimately come from one seller, the US Treasury.

At the beginning of 2020, the total amount of all Treasury bonds issued by the U.S. Treasury was only $23 trillion. Now, the total nominal value of Treasury bonds is $30 trillion. In just two years, the U.S. Treasury has sold a whopping $7 trillion of bonds.

In other words —

It looks like the Fed “lost” almost $600bn;

The fact is that the US government has “borrowed” the Fed’s losses, and the losses of all the investors who had previously bought Treasuries!

Just how good the U.S. government is at “making money” can be seen in this chart of the market value of debt issued by the U.S. Treasury.

At the beginning of 2022, the market value of all federal government debt was $23.566 trillion. Now, the market value is $22.522 trillion. That’s more than $1 trillion for the Treasury.

All of the Fed’s losses add up to less than the government has earned in recent months.

Now do you understand?

The so-called “profit” and “loss” of the central bank is the double play between the central bank and the government under the credit monetary system.

Under the credit money system, the government of any country and the central bank, all the time are exchanging, all the time are coitus, whenever the government needs money, the central bank will find a way to print it. The so-called “central bank independence” is a FIG leaf smaller than a thong.

 

 

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