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?
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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."
Investments benefiting from rising rates are leveraged short Treasury ETFs like the ProShares UltraShort US Treasury 20+ Bond ETF (TBT) and the Direxion Shares US Treasury 20+ 3x Bear Shares (TMV). Both ETFs have jumped between 30% to 50% over the past three months. Not bad when considering the total U.S. bond market (AGG) has lost 2.83% while long-term U.S. Treasuries have fallen an even harder 11% year-to-date.
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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.
This could have a serious domino effect. It could paralyze the Fed's ability to defend the dollar's purchasing power, causing Treasury prices (TLT) to fall further and thereby push interest rates even higher. Just imagine the unimaginable; a weakened and impotent Fed.
The ETF Profit Strategy Newsletter uses a combination of technical analysis, market sentiment, and common sense to be on the right side of the market. Since the beginning of the year, 78% of our ETF picks have turned a profit and 525% was our biggest gainer. (through 6/30/13)
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