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Is The Fed Trying To Create A "Bond Run" Panic? Yes... In Its Own Words

Tyler Durden's picture


One of the most significant, if underrpeported stories of the week, was the announcement from Monday that in order to "prevent" bank runs, the Fed is preparing to impose "exit fee" gates on bond funds, in what, the official narrative goes, is an attempt to prevent a panicked rush for the exits. Of course, this is diametrically opposite of what the truth is.

This is what we  said: "it goes without saying that "discouraging investors" from withdrawing funds is the last thing on the Fed's mind, which knows very well that when it comes to investor behavior all that matters is how the Fed's future intentions are discounted. And with this unprecedented step, the Fed is sending a very clear message: it may be next year, or next month, or next week, but quite soon you, dear retail bond-fund investor, will be gated and will be unable to pull your money.... what is the obvious desired outcome, at least by the Fed? Why a wholesale panic withdrawal from bond funds now, while the gates are still open, and since those trillions in bond funds have to be allocated somewhere, where will they go but... stock funds."

But wait, this would mean that instead of attempting to prevent a rush for the exits, the Fed is in fact doing the opposite, and is seeking to force investors to sell those sticky bonds they are holding on to and destroying the propaganda of a recovery (remember: you can't pitch a stable inflation-driven recovery fable when the 10Y is trading at 2.50% in the process launching the very run for the exits it is supposedly trying to avoid.

Pure conspiracy theory right?

Well, maybe. But that doesn't explain why someone else who agrees with our assessment is none other than... the Fed?

That's right: here is what a recently released research paper by Cipriani et al of the New York Fed titled, "Gates, Fees, and Preemptive Run" found:

Our paper is the first to show that the possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that  would not otherwise occur. This contrasts with the existing literature, which focuses on whether suspension of convertibility can prevent runs. In other words, we show that rather than being part of the solution, redemption fees and gates can be part of the problem.


... we show that there can be preemptive runs that occur only because an intermediary has the ability to impose "standby" (liquidity-contingent) gates or fees. Second, we show that for an intermediary that maximizes the expected utility of its own investors, imposing a gate or fee can be ex-post optimal. Hence, for an intermediary that can restrict redemptions in a crisis, a policy of not imposing such restrictions may be time-inconsistent. The financial intermediary might like to commit not to restrict redemptions, so that preemptive runs would not occur. Absent a means of ensuring commitment, however, the intermediary will find it optimal to suspend, con firming the beliefs of informed investors who withdrew preemptively.

Stated far more simply: the mere prospect of gating creates a self-fulfilling prophecy that results in the very bank run the gate was designed to prevent.

One can be sure that the same Fed, which is proposing "exit fee" gates is quite aware of this paper's conclusions. In fact, one can be certain that the Fed is imposing said gates precisely due to the findings of this paper.

In other words, the Federal Reserve, tasked with preserving financial stability, because not even the Fed pretends to be in the inflation and unemployment dual-mandate business any more - it is all about the "not a bubble" valuation of the S&P 500 - is actively seeking to create a bond run panic!

We wonder just which part of the Fed's "financial stability mandate" covers the Fed's attempts to spark a bond sell off.

Ironically, subversive intentions aside, as usually happens with the Fed when the intended theoretical outcome comes crashing down in the real world, an attempt to created a "controlled" panic, limited solely to bonds may very well backfire and result in a paniced withdrawal of other asset classes, including the most precious one of all to the Fed - equities.

Our results have broader policy signi cance. Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs. Much of the wider policy signi cance of that risk is beyond the scope of this paper, since our model does not incorporate the large negative externalities associated with runs on financial institutions, including MMFs. But one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds are indeed vanishingly small.

Example of the above: the S&P downgrade of the US which was supposed to drive investors out of bonds (and into stocks), had precisely the opposite effect.

But more importantly, now that the Fed has explicitly said in no uncertain terms that gating bonds funds will likely result in a loss of "financial stability", the next time there is a mandated market crash originating from either a bond run, or wholesale liquidity extraction panic, the world will know just who the guilty party is: the Fed.

Full paper below (link) 

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Thu, 06/19/2014 - 10:33 | 4873540 Murf_DaSurf
Murf_DaSurf's picture



Proving the whole thing is a Show run by Clowns, i.e. a murderous Clown Show

Thu, 06/19/2014 - 10:38 | 4873569 Manthong
Manthong's picture

Heh heh..

This is what you get when you let .gov give control of the currency to a stinking banker.

We need another Andrew Jackson about now.



Thu, 06/19/2014 - 10:37 | 4873581 JRobby
JRobby's picture

Army of Jackson's and about a thousand shipping containers full of Jackson's to finance the "campaign"

Thu, 06/19/2014 - 10:40 | 4873588 Manthong
Manthong's picture



As when a conjurer takes a lease
From Satan for a term of years,
The tenant's in a dismal case,
Whene'er the bloody bond appears.

A baited banker thus desponds,
From his own hand foresees his fall,
They have his soul, who have his bonds;
'Tis like the writing on the wall.[4]

Thu, 06/19/2014 - 10:40 | 4873595 THX 1178
THX 1178's picture

The US is taking pointers from Russia.

Thu, 06/19/2014 - 10:45 | 4873612 SoberOne
SoberOne's picture

From the "No Duh" files! Again, all their actions signal intent to destroy our flawed system. One world order at a time.


Not for the benefit of We the people...

Thu, 06/19/2014 - 10:49 | 4873651 Manthong
Manthong's picture

“US is taking pointers from Russia”

..if only that was true.

..looks to me like we are taking pointers from North Korea.

Thu, 06/19/2014 - 10:59 | 4873686 jbvtme
jbvtme's picture

come the days of atonement and the banker's bloated corpses are rotting in the streets, my greatest fear is that the jackals and vultures will refuse the feast...

Thu, 06/19/2014 - 11:00 | 4873705 Newsboy
Newsboy's picture

Stockman has a post on this; calls it "Fed-Gate".


Thu, 06/19/2014 - 11:24 | 4873810 Oh regional Indian
Oh regional Indian's picture

Someone needs to Burn the FIRE economy.....

Thu, 06/19/2014 - 11:40 | 4873883 nope-1004
nope-1004's picture

This "free market thingy" the Fed is doing is the envy of the world.  Amazing how free markets work so efficiently.  lmFao!


But, not so much.  This is onion politics and idiotic economists pulling strings hoping to make sumpin work.


Thu, 06/19/2014 - 11:51 | 4873927 Oh regional Indian
Oh regional Indian's picture

When Hopium runs out, they will count the Hoes and the Opium...line items...hah! 

Thu, 06/19/2014 - 12:33 | 4874088 economics9698
economics9698's picture

Interpretation “Fuck single digit inflation, time to get Venezuelan with the goyim.”

Thu, 06/19/2014 - 11:42 | 4873904 Manthong
Manthong's picture

I have a few yellow bottles of MAPP that could help.

Thu, 06/19/2014 - 11:48 | 4873923 Oh regional Indian
Oh regional Indian's picture

 MAPP: Magnificence's Academy of Packaging Professionals?

I kid you not!

mapp.co.in   :-)


Thu, 06/19/2014 - 12:21 | 4874035 Manthong
Manthong's picture

ha ha ... are they gilded in gold?

(maybe smuggled in some cavity)

Thu, 06/19/2014 - 12:28 | 4874071 Manthong
Manthong's picture

hey ORI.. if you are living out east there...

What are they getting for 28 grams of Ag nowadays?

Thu, 06/19/2014 - 11:47 | 4873915 kchrisc
kchrisc's picture

Those in bond funds should be scrambling for the exits, as this pronouncement by the FedRes just killed the unicorns. And why would anyone want to wait until they impose these new poisons?

Run for the exits marked gold and silver.


“Steel, lead and guillotines are also commensurate investments as well.”

Thu, 06/19/2014 - 11:04 | 4873720 Manthong
Manthong's picture

have hope.

the hyenas await..


Thu, 06/19/2014 - 11:25 | 4873819 maskone909
maskone909's picture

when it all falls down, i will be chillin eating mariscos, counting my stack while watching the retards on cnbc plead that nobody saW it comming!

Thu, 06/19/2014 - 10:59 | 4873693 eatthebanksters
eatthebanksters's picture

This would be similar to something like Florida State leading Alabama in a national Championship game and the refs changing the rules at their whim to give Bama a victory.  (I love Bama, so don't take this as a slam - just using two great teams as an expample). This is as bad as changing the definition of default last year when the Greeks defaulted and no one wanted to pay out on CDS and start the implosion.

You know the shit is fucked up when they do unnatural shit to prop something up and then change the rules to keep it going. Yay!  The goverment always speaks the truth, don't they?  And Central Planners always fix things, don't they?  I guess neither of them has heard about or understand the laws of nature...

Thu, 06/19/2014 - 11:31 | 4873837 Manthong
Manthong's picture


I had to hit myself heavily in the head..

I apologize for not recalling the poster who said something like this..

Paraphrase:  juxtaposed..  … like f me.. we are like soviet Russia in the ‘50’s and they are now like us in the ‘50’s…

Crap.. I do not want to die in the Soviet Union of the Un-United States of Vespucci.

Thu, 06/19/2014 - 11:58 | 4873946 WillyGroper
WillyGroper's picture

by all means don't watch this then.


Mao & Lenin fed the corpses to the people.

Thu, 06/19/2014 - 13:34 | 4874427 Manthong
Manthong's picture

crud.. you have to pay attention this..

sleep and dreams.. Hermes the thief...

I did not realize what a mythical schmuck he was. 

Thu, 06/19/2014 - 16:37 | 4875190 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

I think that came from the John Birch Society, pretty good prediction, no?

Thu, 06/19/2014 - 10:50 | 4873655 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

What? They don't like the ZIRP stagnation monster they have unleashed.

Thu, 06/19/2014 - 10:44 | 4873621 NoDebt
NoDebt's picture

When Cyprus imposed capital controls, the sheep didn't panic.  Just stood there and took it.  All the crony-connected money had, of course, already left the country weeks before.

This idea of a "panic" is ridiculous.  Nobody will panic because:

1.  They will never know it happened, because nobody will ever report it.  It'll be buried down deep in the fund prospectus, which nobody reads.

2.  The sheep don't know the sound of the slaughter blade coming down on their necks until it's already happened.  

3.  It applies to retail funds.  Nobody gives a flying shit what retail does.  They're bred for slaughter from day one.

Thu, 06/19/2014 - 11:09 | 4873746 MrPalladium
MrPalladium's picture

This fed proposal for lock ups and exit fees for bond funds has the sole purpose of making sure that the U.S. dual citizen oligarchs get out of bond funds now while they still can. The NY Fed's piece is just reinforcement of the message, namely that the Fed is ready to take bonds lower in price, higher in yield.

Thu, 06/19/2014 - 11:15 | 4873767 Oquities
Oquities's picture

1.  Establish exit fees

2.  Jack up intersest rates

3.  Cease exit fees after public outcry

4.  Watch public exit all bonds in panic

5.  Use Fed money creation ability to purchase desirable outstanding bonds for Fed balance sheet (mortgages?) at pennies on the dollar

6.  Reduce rates again

7.  Sell balance sheet inventory at huge profits

Thu, 06/19/2014 - 12:17 | 4874025 Buck Johnson
Buck Johnson's picture

Exactly, but thats if it goes accordin to plan.  I don't believe it will.



Thu, 06/19/2014 - 14:31 | 4874663 saveandsound
saveandsound's picture

"at pennies at the dollar"

That won't happen. In that case the world would burn. No need to buy back paper.

Thu, 06/19/2014 - 12:04 | 4873973 Banker Buster
Banker Buster's picture

I agree, they are preparing for the eventual interest rate increase.  Once rates go up which they have to eventually to normalize the system, bonds are going to get annihilated.  Being an optimist (gets harder every day), I think they want to avoid everyone from getting destroyed in bonds when they do increase rates.  However, they can't get people out of the way of the cement roller, austin powers style, people just wont move.  So they want bond investors to move out of the way or be more likely to wait out a crash in bonds.  All the while, stocks will go down when interest rates are raised, but they go down less because some bond money is now in the stock market to cushion the blow by adding liquidity.  I think that's the attempt at least by the fed and if that were their intention, then it does at least try to meet their financial stability job.


They are just trying to undo what fuk face bernanke did when he doubled quantitative easing to 85 billion.  He went rogue and his ego got in the way of rational thinking, because QE wasn't working and he wanted to go all in, it works or he dies trying mentality.  Deep down that asshole knows you stimulate hard at the beginning of a crisis then let off the gas, you don't do it 4 years out.

Thu, 06/19/2014 - 11:32 | 4873847 asteroids
asteroids's picture

Should bonds crater and peoples pensions be wiped out, I suspect the hunting of bankers might turn into a national sport.

Thu, 06/19/2014 - 11:58 | 4873948 El Vaquero
El Vaquero's picture

Perhaps, perhaps not, but if it does, the sheep will likely turn on the closest representatives of the bankers first.  While I wouldn't lose any sleep over the nearest BofA, WF, big megabank branch being burned down, I suspect that angry sheep might try to make sure that the tellers and branch managers are inside when it burns.  These are people who, while part of a corrupt system, likely don't even comprehend that they are part of a corrupt system. 

Thu, 06/19/2014 - 12:02 | 4873961 WillyGroper
WillyGroper's picture

Hunger games for real, indeed.

Thu, 06/19/2014 - 12:25 | 4874061 Kirk2NCC1701
Kirk2NCC1701's picture

If only, but I doubt it.  People are sheeple.  And you know what sheep are good for:

Herding, milking, shagging, shearing, fleecing, butchering and consuming.

Predators (smart, strong, fast, dilligent, cunning and organized) beat and eat the prey (dumb, weak, slow, lazy, naive and disorganized).  Even if outnumbered.  I feel sorry for you (but not too much), if the Bible or mamby-pamby Sunday School didn't teach you the real facts of life, or Mother Nature's laws.  Which have been true for the last Billion years.

Thu, 06/19/2014 - 13:03 | 4874264 Kirk2NCC1701
Kirk2NCC1701's picture

I think the real takeaway here is whether ZHers have learned anything to front-run the Fed.  And I don't mean the way many got burned by buying PM on the way up, during QE front-running (Summer-Fall 2012).

The question is:  (a) is ZH right about the Feds' motives and intent, and (b) if we do try to front-run the Fed again, will we be safer this time?

This is not the time to bitch & moan like an under-tipped whore.  It's time to stand up and be counted, I'd say.

Thu, 06/19/2014 - 10:42 | 4873615 post turtle saver
post turtle saver's picture

Fed policy is "opposite day"... forever

Thu, 06/19/2014 - 10:43 | 4873616 PartysOver
PartysOver's picture

Oh the Humanity...  The death, the desctruction of a horrible accident on the Fed Highway.   Only one car was involved.

Upon further review the goring scene was just the makeup of the 12 clowns riding in one car.

My bad.

Thu, 06/19/2014 - 10:49 | 4873649 Gamma735
Gamma735's picture

The Fed Reserve, nothing but a bunch of Juggalos

Thu, 06/19/2014 - 11:30 | 4873836 ThaBigPerm
ThaBigPerm's picture

Easy-cheesy litmus test to determine whether they're trying to prevent a run, or cause one.

If they're trying cause one, they will announce with a bullhorn that they're considering closing and locking the gates, just not yet.  But "oooh!" are they seriously considering it.  MSM yackity-yack heads will debate the possible effects of shutting the gates ... papers are issued debating this or that aspect of closing the gates.  They may even actually, at some point, lock the gates after the horses are gone.

If they're trying to prevent a run, you wake up one morning to find the gates locked.  No warning, no MSM yackity-yack.

Thu, 06/19/2014 - 14:19 | 4874581 cowdiddly
cowdiddly's picture

You always know beforehand if the guy trying to get in your front door is a criminal or the cops. If it is the cops they will be hollering at the top of their lungs. A thief you wont hear crap.

Thu, 06/19/2014 - 11:39 | 4873893 Lionhearted
Lionhearted's picture

If a run is what happens then a run is what they wanted to happen.

Thu, 06/19/2014 - 12:06 | 4873983 WillyGroper
WillyGroper's picture

Kyle Bass said they're going to kill the dollar.

What better time to do it then after said run?

Thu, 06/19/2014 - 12:33 | 4874086 Kirk2NCC1701
Kirk2NCC1701's picture

Financial Iceberg Slalom.  It's a kinda magic.

Don't try this at home, kids.  We are trained professionals. /s

Thu, 06/19/2014 - 13:50 | 4874506 JLee2027
JLee2027's picture

To create a bond run, stop buying them, simple as that since the FED is the major and only buyer of bonds mostly.

So, no, they aren't trying anything.

Thu, 06/19/2014 - 10:31 | 4873541 madbraz
madbraz's picture

These criminals at the federal reserve don't even care anymore if the BS they spew even makes any sense, as long as it serves their masters.


let's invest in a money market fund that has ZERO returns, invests in european junk commercial paper and may not allow you to redeem your money when you want it.  


it's like trying to sell used toilet paper.

Thu, 06/19/2014 - 10:31 | 4873542 Stoploss
Stoploss's picture

========================FUCK THE FED=========================

Thu, 06/19/2014 - 12:17 | 4874031 lakecity55
lakecity55's picture

I am not suggesting this, it's only an observation, but if a certain Tribe suddenly disappeared from the Earth, things would be quite different.

Thu, 06/19/2014 - 13:39 | 4874445 Lmo Mutton
Lmo Mutton's picture

If a certain Tribe suddenly disappeared from the Earth, things will have been as they were prophesized.

My research says it goes down hill fast from there.  Like LC62 won't even help.

Do NOT follow this link or you will be banned from the site!