1% Spike In Yields = $200 Billion In Losses For US Firms

Tyler Durden's picture

Back in May, just after the BOJ unleashed its epic QE program, which on a relative basis was about twice the size of the Fed's own QE, and when bond yields for JGBs suddenly soared higher before a flurry of bond market halts forced the BOJ to completely take over the entire JGB market, the key question among the financial community was how big the losses for Japan's banks would be as a result of a big jump in yields. We provided the answer: "A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks." Or, roughly $100 billion for 100 bps. Which is why the BOJ promptly decided to take away from the market the ability to set yields on the margin: after all the paradox of pushing for inflation and keeping bond rates low did not compute so might as well do away with the bond market entirely.

Fast forward to today when it is not Japan but the US that suddenly the topic of discussion over the possibility of spiking rates (thanks to the Fed's recently announced creeping taper), and specifically how big the losses at US bond funds and various other financial institutions would be as a result of a 1%, 2% or bigger jump in rates. Now, courtesy of the Treasury's Office of Financial Research, we know precisely how badly US investors, funds, and financial firms would be impaired should rates spike.

To wit:

Losses from a given change in interest rates would be larger than in the past. These positions increase the vulnerability for some market participants to outsized losses that could be difficult to absorb in the event of an unanticipated increase in long-term rates. To assess the degree of vulnerability, we simulated an adverse interest rate shock to estimate losses by bond funds from an instantaneous parallel shift in the yield curve of 100 basis points from current levels. We then compared the impact of such losses in today’s context to loss rates from a similar hypothetical scenario during the three previous periods of U.S. monetary policy tightening. Losses during each tightening cycle are calculated by averaging monthly estimated losses, where the Barclays Capital U.S. Aggregate Bond Index is used as a proxy for duration and mutual fund bond holdings are based on data from the Investment Company Institute. Figure 15 shows that losses could rise to nearly $200 billion, underscoring that current bond portfolios are vulnerable to a sudden, unanticipated rise in long-term rates.

Which brings us to this simple rule of thumb:

A sharp 1% spike in yields would lead to

  • $100 billion loss for Japanese banks
  • $200 billion loss for US banks
  • As for European banks whose balance sheets are loaded up with sovereign bonds, the are literally off the charts.

So bring on the bond sales. Let's hope that everyone sells in a calm, cool and collected manner or else the bond funds (oh wait, the same entities who are selling, and are thus motivated to sell first and avoid future losses) get it...

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Beam Me Up Scotty's picture

And here I thought we had to worry about an oil shock.  Now its an interest rate shock we have to worry about!

DeadFred's picture

Who cares about the effect of a 1% rise in yields, what happens with a 3% yield?

Seer's picture

Yeah, quit fucking around with the appetizer, let's get down to the (eventual) main course!

caShOnlY's picture

Who cares about the effect of a 1% rise in yields, what happens with a 3% yield?

the moral of this story is there yet again the banks!!  Higher interest rates will cause BANK LOSSES.  So  just like Japan, the FED will take over the bond market before the yields produce negative effects.  

There are only 2 choices of poison here: either accept the higher interests or destroy the currency holding them down.  Thus the reason why many say there will not be a taper but an increasing of QE.  This is also why you see many stacking PMs as they believe the money spigots will eventually be opened wide.  This is forward thinking from looking backward at history.  It would also seem that some Nations are even stacking for that day.

This is a "take the pain now or take the pain later" game.  Now just to add another piece to the puzzle: look at the govt prepping.  They seem to be preparing for wide spread civil unrest.  I would say they have also tipped their hand as to the choice that has been made as very hungry people holding worthless money will be in the streets (but the good thing is all the debts will be paid back in ONE DAY!!).  

Oh, sadly they will get the guns before that days comes.  Americans are not really forward thinkers. 

...... and just like the FED Americans have 2 options right now:  Stacking or Stawking  

A82EBA's picture

I will fight to the death for my (and your incidently) second amendment rights..they will not get my guns without a fight. US may become one heavily armed third world bunch of people. The second the gov attacks its citizens the wagons will circle..we are fanatic freaks about the right to be armed and theyll lose on that front. We just havent gone 'Proactive' yet.

Exponere Mendaces's picture


Yeah, I'd love to believe that romanticized version of people "standing up to the man", when we both know that the reality would be a bit different. Most people are afraid of criticizing the government, much less going against it. And if they're not afraid, they think people who do oppose any government action are traitors and should be hung.

So, you'd get a few enclaves of "shooters" that would be put down by a few squads of militarized police goons, and then everyone else would be clapping from the sidelines praising the "heroes" of eradicating the domestic "threat". You know, just like everyone fell over themselves to tweet about the exciting block-to-block search/lockdown in Boston.


No protest, no consideration that they were enabling precedent into some home invasion without a warrant scenario. No, they were excited and titillated that they were part of the dangerous DRAMA unfolding in the city.

That is the America you have, and it's just the pitiful truth. How do you think they've gotten away with all of their shit for so long. There are no real patriots left.


A82EBA's picture

I think you're right if that were to occur today under present conditions. I was refering to circumstances during a future time of widespread civil unrest, bond market collapse, entitlements cancelled, much higher unemployment, much higher price inflation..a time when military and police become more concerned with protecting the Constitution, their families, friends and like-minded patriots than they are with their 'jobs' of being muscle for BigGov tyranny.

Seer's picture

underscoring that current bond portfolios are vulnerable to a sudden, unanticipated rise in long-term rates.

When the fuck would it NOT be sudden or unanticipated?

Gutenberg's picture

Ben will just print moar and give it to his friends so no loss. Oops I mean lady Ben will do that. The opposite of to big to fail is that you must succeed no matter what. 200 billion, please. Here is 400 billion because you had a little stress. Don't even pay it back and if you lose that we will just give you moar. Hey can i get some of that? F u pay me.

Calmyourself's picture

Crash is optimistic is dead on..  None of these number games matters when you (Fed) controls the production of numbers as well as the BLS.  We can pontificate until the cows come home and until the supply lines JIT are threatened it does not matter.  The Fed will paper this over in ten seconds every last one of us is invested in this paper ponzi scheme by hook or crook that is the genius behind it we will all support it until we cannot put food in our mouths.

NoDebt's picture

We've already had more than a 1% rise in yields off the lows WHILE those funds were stuffed to the brim with nervous investors who fled to the "safety" of bonds since the 08-09' crash.

Lots of money has ALREADY been lost.

The inflows to bond funds have clearly stopped, but I'm not seeing massive outflows from them, either.  At least not at the individual level.  They're just eating the capital losses and sending the coupon payments into cash.

MedicalQuack's picture

My opinion piece here too on what we have to look foward to next year in news as well...seems to me unless I missed something here that the news agencies to stay in business are looking to content farms to get news and stats to us...scary...as the journalisti bot debuts.  Forbes has been doing it for a while now and we know Forbes media is looking for a buyer and the other day was doing a #Foxchat...so maybe schmoozing Fox to sell that platform.  If you read over there enough you can kind of pick out the news stories humans created and what the bot wrote.  This is a full on process and there's a guy who created it and wrote over 100,000 books that he sells on Amazon.  I put the video in my post as well as a few other clips that go along wiith all of it.

Quantitated Justification For Believing Things That Are Not True And Using Mathematical Processes To Fool Ourselves-The Journalistic Bot Functionality Debuts As Media Can’t Resist the Formulas…

The media can't resist the formulas for breaking news and if it has a formula no matter how stupid it is, they blast it and it's not the fault of the journalists who want to keep their job but rather the folks initiating this business model to have algorithms decide what content we are going to get.  It's pretty interesting as it can mine and scan a news article written by another agency, change the wording and title and have a brand new article.  Wall Street Journal has been telling all they are changing their online news format so it could be they too are moving in this direction and the classifieds are full of ads looking for more reporters.

The news created by the bots by comparison is pretty bland so if you look at enough of them, they start to stick out.  It uses machine learning to write with styles and wording that is currently on the web.  I guess you could call it Zombie news, right:)

Basically I guess we have to really pay attention to what kind of numbers and the values we see in the media anymore.  It's all about numbers and frankly I want humans reporting the news as a human, that's what I relate to, not a bot:)

overexposed's picture

Be honest:  A bot wrote this comment, right?

(I keed, I keed!)

william114085's picture

"My opinion piece here too on what we have to look foward to......"


I stopped reading after "FOWARD"

Dewey Cheatum Howe's picture

All it takes is China or Russia to sell enough off to call out the FED. They have enough juice to move the rates and call out the FED for being a one trick pony if they pull back on the taper. It will just prove they have nothing else in the toolbox and expose that the Emperor has no clothes.

The fact Goldman Sachs (most likely at the FED and State Deparments beheast) called out Gazprom and in turn Putin today to try to keep him from doing just the scenario above.

NoDebt's picture

You hit on exactly why sovereigns and large institutional investors won't do that.  They know any significant price movement would expose exactly that which they fear most- the Emperor being exposed as having no clothes.  They would start the avalanche that would result in the remainder of their holdings being severely devalued.  AND they know that the Fed could come in, distort the market again with their unlimited printing power, and lay waste to them.  Damned in they do, damned if they don't.  So they keep dancing while the music plays.

Squid-puppets a-go-go's picture

and yet there are not enough chairs. someone's gunna jump sooner or later

new game's picture

humans ALWAYS end up doing something to piss off another- then the fireworks begin -count on that. China, India, Brasil, Russia, Isreal - we will piss one of them off big time and they will finally

have had enough of the bully treatment...

key event will be treasurie dumpage and market chaos.


then the swan takes flight,it is too late to prepare. 


disabledvet's picture

this is how I originally thought of the problem back in 2008 when i thought the obvious problem would be one of inflation as QE represented America's "Weimar" moment. Boy was I wrong..and i'm glad i didn't trade on my own rhetoric. (obviously those who have traded on Zero Hedge's rhetoric have been absolutely obliterated.) what confounded me was the total collapse in interest rates at the long hand...in short what started out as comical relief for me ("i demand bikini beach volleyball on the moon as a taxpayer!") quickly became a thought experiment in "2005-07 redux"...namely Alan "Captain Insane-o" Greenspan's inversion of the yield curve "and the guaranteed implosion of Wall Street" (the Big Short) AGAIN. If we were to believe the rhetoric in the article above then obviously we're talking Banking heaven (i.e. the 1970's). the spread product is where the bank...and all of Wall Street...makes it's nut...with more than enough left over for the Government to buy all the votes it wants insofar as the 70's was concerned. Well...laaa-deee-da!...fast forward to "the Gizmo called QE" and instead you get what empirically at least looked to me like banker hell: "another version of the inversion." in short...a curve flattener with nothing but cash on the balance sheets and zero lending. That's why i was never bullish on banks coming out of the collapse...i simply didn't understand the bond market (and apparently i really don't after getting annihilated this summer...although "you should see the other guy.") indeed this year has even been MORE confounding to me. If I didn't know any better I would say the Fed is trying to blow up the banks AGAIN...only this time we're going to throw in a bunch of municipalities, European States, China, Brazil, Mother Russia "and now maybe even some American one's" just for fun. now leaving aside the fact that "the 70's was lot easier" (look at Japan's conquest of "deflation"...easy, right? "devalue and print")...the original plan i thought was to create inflation. Literally...that was what the Fed said. Not..."price everyone out of the market and leave the bulk of humanity high and friggin' dry." that's a lot of moxie, foxie! "now here's your room in the leaky, ill lit basement with the single clanky filing cabinet and a beat up old school desk Mr. Economist guy. Welcome aboard our Bank!" http://www.youtube.com/watch?v=dXbY-CrxO9M
you'll see "us" occupying this: http://architecture.about.com/od/usa/ss/David-Childs-Portfolio_6.htm

NoDebt's picture

If you invest like an economist, you will get your ass handed to you like an economist.

.... says the guy whose official training was in economics, but has spent all his time since learning the much more "real world" side of The Force (the Dark Side).

disabledvet's picture

If Tom Keene of Bloomberg News...who is a truly amazing economist btw...has been trading his thought process...he has been financially ruined. so have all those trading with him i might add. He keeps barking up the wrong tree...namely..."recession, recession, recession." uh, no. The "problem" as it were is "liquidity, liquidity, liquidity"...as in too much of it (starting in North Dakota and the Bakken/also cloud computing infrastructure/also Al Gore's "carbon bubble") and now spreading all throughout the entire State of Texas and now the Marcellus shale formation which spreads all the way from Upstate New York to West Virginia and by some accounts now includes North Carolina actually. to say this has a "dispositive impact" is like saying "Jupiter is kinda like a big planet dude." in other words forget "so what if we have inflation" we now have to concern ourselves with the fact that at the same time the banks are sitting on trillions in liquidity the USA is going through the biggest energy, materials and "means of production" boom in world history...all at the same time apparently. in other words basically the cash in your wallet in effect has become an instrument of state policy as "it is better than even gold itself." http://www.econedlink.org/lessons/docs_lessons/686_oil_answers1.pdf (talk about the ultimate trust fund. oil itself is to be held in trust? and to think people call themselves rich today.) my view of the data could be incorrect...false as it were...or falsely seen...but even if i'm wrong the "other side" of this view i hold has more than a lot of explaining to do. In other words my view if true "does represent a solution to the debt problem"....but only if you are chaste. If you are a wastrel http://en.wiktionary.org/wiki/wastrel (key word being "wasting resources EXTRAVAGANTLY") you will simultaneously be punished by this bounty because you have to put it in the context of QE which is constricting growth leading to a generalized "malaise" or "jobless prosperity." (or "worse"...the context of a booming equity market where assets can be had based upon the issuance of more equity and more equity alone!) this might explain not only why interest rates plunged on the "news" of the "hyperinflation caused by QE" (great news for Treasuries...but the exact opposite for all other types of debt...and a truly massive double top in gold and silver) but also explain why those treasury yields may in fact be set up for a spectacular fall in yield and rise in price in the coming months ahead while at the same time "the rest of planet earth goes belly up." http://www.youtube.com/watch?v=MsK6aRuSBIc (London Whale trade.) this is why i keep saying "the Fed is getting away with murder with the weak dollar." (that thing is a Killer Whale in gold fish clothing in my view) and though this view is contradictory in the sense of being logically inconsistent (and according to almost all the experts "false" or "wrong") even though the banks have "sequestered" all the QE...investment has in fact soared it sure looks true data wise thus "yielding" striking amounts of over capacity while at the same time creating massive amounts of return and...terrifyingly in my view...huge amounts of leverage. In other words certain Very Large Aspects of the US economy are in effect "monopoly renters" simply wiping out entire industries both locally and globally based purely on what should be creating inflation...namely a barely worth anything dollar...yet they have zero debt and huge cash flows. in effect the aposite of 2008's "financial WMD" in the form of US dollar and say...Kinder/Morgan or Tesla... instead of 2008's CDS. needless to say Morgan Stanley et al look to be in an AWESOMELY powerful position vis a vis "pretty much financing all of planet earth" (through debt financing/restructuring, IPO's and just plain old equity issuance) right now. on the other hand: http://www.investopedia.com/articles/financial-theory/08/merger-acquisit... so here's your moonshot: http://seekingalpha.com/symbol/lmt here's your other moon shot: http://www.youtube.com/watch?v=1Cq7hf4ylvY far be it from me to want to be a mere spectator of course.

new game's picture

sitting patiently on sidelines...

no bonds, no stocks

no worries...

virgilcaine's picture

Some plump bond pigs are in the pen, ready for harvesting. sooooie! I mean THIRTY YEARS for a bull market is getting a little long.


papaswamp's picture

People in bonds and FX need to be careful. Control over bond yields will most likely come through FX manipulation. Certainly seen today. DXY should have blown through the roof and stayed there on the GDP numbers. Though it initially spiked...it was quickly squashed towards yesterday's lows.

Spungo's picture

I don't understand. Is the article suggesting some idiots actually bought government bonds that have negative real interest rates?

graspAU's picture

You mean the Federal Reserve Note that we all use? Sort of an instant maturaty bond. What's the negative rate on that 8-9% compounding on anything people actually need like food and energy?



TimmyM's picture

Black swans are not what everyone expects by difinition.
The black swan is deflation despite QE 5. Followed by massive losses in junk bonds and commercial real estate. Bank failures and oh yeah-
a collapse in Treasury rates.

ebworthen's picture

C'mon 6% on the 10 Year T-Bill!!!

Oldwood's picture

I can only assume that the markets are structured so that for one to gain, another must lose. There is no product or service here simply bets and money chaning hands......so, big losses must mean big gains for someone, right? I guess we just watch the batting schedule and see who is up to bat to know if it will be a hit, ball or strike. Who are the real players and what are their positions. It seems pretty obvious to me, short of a really big ole black swan, nothing will change their course. Taper up or taper down...THEY decide, not us.

0b1knob's picture

$100 billion?  Chump change.

How man TRILLIONS have been stolen from savers, pension funds and insurance companies by ZIRP?

resurger's picture

What was the Fed's DV01 X 100?

Duude's picture

I think the whole point of the Fed's delay in tapering was to provide ample time for institutions to adjust their portfolios whether to reduce their durations or hedge their positions before the start to the Fed taper. By doing this the thinking would be the slow Fed taper would reduce abrupt interest rate changes to the market.  Basically the Fed telegraphed what they were going to do 3 months ago for institutions to prepare. There will likely be NO sudden 100bp changes to the bond yield curve. It will be gradual, and the Fed retains the flexibility to do what they want to make that happen.

moneybots's picture

"By doing this the thinking would be the slow Fed taper would reduce abrupt interest rate changes to the market."


Greenspan raised the rate 1/4 point per meeting.  The 2008 crash happened anyway.

graspAU's picture

"adjusts their portfolios" includes farm out their biggest expense to as many places around the world where the labor is glad to make a few dollars an hour or even a day. The new off shoring term you just have to love is near shoring to the same hemisphere, so they can get rid of that excuse that they can't get rid of a job because of the timezone difference. And the jobs are gone and never coming back.

all-priced-in's picture

Considering the multi layers of rehypothication - combined with the fact that interest rate risks are mostly hedged using the derivatives market

The losses in the banks - on balance sheet bonds will be a small fart in a hurricane.

Plus all they need to do is classify the bonds as long term holdings and they do not even have to mark them to market.







evernewecon's picture




(There're Winners/Losers In

Any Dynamic Moment; High 

Savings Yields Can Reflect

An Efficient Economy As Much

As An Otherwise Inflationary One.)



Definition Of A Market Top:




More People Are Possessed Of More Bullish Conviction 

And Willingness To Go Net Long

Than Ever Recently And Not So

Recently, And, Are Wrong.



Definition Of A Market Bottom:


More People Are Possessed of More 

Bearish Conviction And Willingness 

To Part With Assets Or To Go Net

Short Than Ever Recently, And, 

Are Wrong.


With Free Reserves The Banks 

Sold Their Own Bubble For Time

Value; And, They Used Our Money

For Loss Sharing.


The Inflation Has To Go Somewhere.

They Sold That.


Prior To The Financial Crisis, 

For All The Bankers Who Bought Their

Self Made Mortgage Bubble, There

Were Those Who SOLD It, Making The

Right Call, Only To Have Faced 

The Policy Of Hand It Over.


Those Following Investment Counselors'

Advice Scrupulously Given And Dutifully

Followed Will Always Be At Sufferance

Of The Same Fate.


There Are Obviously A Lot Of People

Commuting To Board Rooms Stuck In

Consensus Pressure Ruts Who Simply

Follow The Carrot.


You Can Make It Happen By Being

In The Mortgage Business And

Selling Bundles Of Unqualified 

Borrowers' Commitments.


That Runs Parallel To Running 

Down Gold's Price And Then

Buying Gold Miners.


That Runs Parallel To Being, Oh, 

Say, In The Oil Business But Also

Banking, Theoretically.

Then You Can Lend To Would Be 

Competitors, Flood The Market 

With Oil, And Call The Loans.



Sharecroppers.. And All That Oil.


Maybe Those Who SOLD The 

Bubble Should Simply Be Glad

They're Supposed To Not Exist

Instead Of Actually Being Demonized.








ArrestBobRubin's picture

Taper my ass.... Of course they've kept ZIRP in place- - more free money to the "banks" as life support. And as soon as Treasury interest rates creep up, look for Yellen and her global financial crime syndicate controller Stanley Fischer to do the only thing they know how to do: print money and ruin the average American.

Is this $10bn cut in trash purchases even real, or just a media event meant to allow Bernanke to claim that he was the one who (heroically) began to wind down QE. Now does anyone who doesn't make a living off our rigged "financial sytem" think the American "economy" is in any condition to stand on its own 2 feet?

I know this will be hard to believe, but Stanley Fischer also just happened to be a "mentor" to BS Bernanke- - isn't that special? Ben goes, Stan stays to work the strings of the Fiat Syndicate's latest figurehead in the US. What could possibly go wrong?

WASHINGTON — Stanley Fischer, the former governor of the Bank of Israel and a mentor to the Federal Reserve’s chairman, Ben S. Bernanke, is the leading candidate to become vice chairman of the Fed, according to former and current administration officials.

moneybots's picture

"A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks."


Rate shock?  ZIRP is rate shock.  QE is rate shock.


A manipulated market always manipulates back.

yogibear's picture

Nio kidding. Rates  have hit the bottom. 

No where eles to go but up for years to come.

All the Fed has done is to enrich the banksters at the expense of the average citizen.. 


OnceandForever's picture

Rates are going lower.



U4 eee aaa's picture

So the dominoes are all in place. If the Fed wants to bring the house down they can do it by pressing a button

falak pema's picture

the only way the Algo Oligarchy will resolve this problem is to integrate into the Algo a bail-in mechanism organised by the banks to bring in private capital back into the real economy instead of feeding the perpetual WS beanstalk that obliges the TBTF to orient the algo towards derivative plays and bond purchases fed on ZIRP and QE.

If there is growth then this will be possible; the euro banking alliance has been done for that reason.

What the system cannot resist is shock therapy of sudden interest hike. The algos have to find a way of solving that.

Come on Blankfein, Yellen and Dimon, come on with a solution to avoid bond armageddon. 

We all know, as the 4 year currency war shows, every oligarchy group tells the other : YOU FIRST MUTHAFUKKA ! 

hahaha; when the emperor has no clothes, we'll know for sure who is faithful to whom, or else the Algo will go rampant like  Frankenstein on the loose.

"I'm Ben LAden's ghost!"...yikes, Banco's ghost comes to visit Macbeth of FED. 

falak pema's picture

When she comes to the FED to do God's work on QE, Yellen will want the World to say to her, like the Ghost urging Hamlet not to seek vengeance on Queen Gertrude : 

"Leave her to Heaven, and to those thorns that in her bosom lodge to prick and sting her."

Hmm, but Hamlet was like Nemesis, he had to do what he had to do!

So will that crazy market. As you can see it looks a spooky world to me! 

wagthetails's picture

Cool. 6% loss, i guess those 7% annualized return assumptions in pension funds aren't that far off after all