Chatter Of Fed Balance Sheet Unwind Spikes Yield Curve

Tyler Durden's picture

While the Fed watchers have been obsessing in recent weeks about the pace and size of any upcoming Fed rate hikes, summarized best by Dallas Fed president Robert Kaplan who earlier today said:


... and unexpected new buzzword emerged today, namely Fed balance sheet unwind when first Philly Fed's Steve Harker noted it in his speech earlier this morning...


followed later in the day by St. Louis Fed's James Bullard who, likewise, hinted that selling Fed assets may be coming soon:


Of course, how credible it is that the the Fed may actually engage in this is anyone's guess: should the Fed "unexpectedly" start to reduce its balance sheet, the impact on global yields would be devastating, and make the Taper Tantrum and the TanTrump seems like child's play in comparison. Which, perhaps, is why today for the first time we got not one but two such "trial balloons" from two separate Fed presidents, just to gradually acclimate the market with the concept of upcoming balance sheet normalization.

The mechanics of such a process are rather mindboggling, especially coming at a time when even the Republicans are pushing to layer on an addition $9 trillion in US government debt over the next decade, which - all else equal - would mean require more QE to monetize the deficit, precisely the opposite of selling Fed-owned Treasuries.

Then again, the Fed has been known to make major, and quite public, mistakes. Whether this is one of them, and whether it is intentional remains to be seen, however the sharp steepening in the curve that has taken place today amid the sudden Fed talk of Fed balance sheet unwinding, is very much unmistakable.

The only (perhaps rhetorical) question is how such an unwind won't impact stocks far more than bonds. And then we remember that nothing can possibly ever have an adverse impact on stocks, and all is again well with the world.

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NugginFuts's picture

Does this mean we get all our old subprime mortgages back now? Please pretty please?

walküre's picture

Funny you should mention subprime mortgages in this context. Sure feels like it's 2007 all over again.

NotApplicable's picture

My guess is that the Fed's balance sheet can never, EVAR shrink.

Boris Badenov's picture

To shrink would "reduce the availabl money supply/credit" otherwise known as DEFLATION. Does The Fed want that?

Not that we are anywhere near letting the "rolloff" just sit. Currently, I estimate that ~$40 billion /month gets reinvested into (this month) MBS.

Bay of Pigs's picture

Property values are back at peak housing bubble prices here in Maui again.

thesonandheir's picture

Reverse QE bitchez! 

QE crack addict's picture

Noooooo, I need more QE u greedy motherfuckerz

jus_lite_reading's picture

Just wait until Trump signs the "Audit the Fed" bill!



PS- That chart looks way worse than it is. Chill guys. Keep your eyes on the 10s

Yen Cross's picture

   LOL- Tell that to all your[EM] swaps partners, and the ECB. 

   P.S. don't forget the BoJ.

Citizen_x's picture


Does this mean selling their Bonds and depressing yield ?

Making other maturity holder to think twice about holding to maturity ?

Yen Cross's picture

 Two completely different conversations. Yes they're linked.


asteroids's picture

Unwind the balance sheet to who?

OpenThePodBayDoorHAL's picture

Back to the banks they bought all that crap from, then they can have a national bank holiday and a bail-in. It's either that or they flog it all to the Central Bank of Mars...and they don't seem to be answering their phones. Janet even went into the special chamber and put on her Eyes Wide Shut robes but nobody picked up.

Justin Case's picture

USA Inc. President. They owe the FED $871 billion in just treasuries. FED wants repayment from the serfs.

Yen Cross's picture

   Great comment.  Back to the primary dealers, which means the the Fed. whould have to decide what end of the bond /Treasury market could absorb the shock.

 The Fed. want's inflation but dumping tons of fake cash financed debt back into the bond markets could be extremely harmful, if demand isn't indicative of interest rates. [stagflation]

oddjob's picture

If there was a real buyer for this crap, they would have bought it in the first place.

jamesmmu's picture

Tomorrow - Friday - D- day is coming, banks will start their earning report.

DarkPurpleHaze's picture

They'll  either change existing regulations or create new accounting methods and standards that will enable them to do whatever they need to do to gain some semblance of balance sheet normality.

All they need is the element of time to gradually stretch out any shocks from causing a market panic or distrust in the Fed.

Those who write the bills that eventually become laws can get away with almost anything as we've seen repeatedly. Sad but true.

buzzsaw99's picture

nobody wants to buy janet's old laptop or her fake earrings.

Grandad Grumps's picture

The Fed should not unwind. What they should do is simply foregive all government debt held by the Fed and then raise rates. So, bond traders get crushed. There should always be risk and they made money risklessly on the way down.

rccalhoun's picture

and then launch QE infinity to buy stocks

P Rankmug's picture

This is exactly what I wrote in September 2016 would have to happen.  Fed funds rate hike requires concurrent manipulation of shadow banking system. Fed can't accomplish rate hikes above 1%.  Each rate hike requires greater manipulation.

trillion_dollar_deficit's picture

Of course. No more Obama means no more need to prop everything up with a $4.5T balance sheet. 

curbyourrisk's picture

Between all the infrastructure spending anticipated and the addition of $9 trillion of debt....  why does anyone think Trump wants higher rates?

Bam_Man's picture

What they are actually saying is that to get the Fed Funds target rate above 1.00%, it will require them to shrink the balance sheet (remove liquidity from the system via Open Market Operations, by selling securities).

This should not be a surprise to anybody, except perhaps those who thought the Fed had no intention of ever getting above 1.00% on Fed Funds to begin with.

cat2005's picture

Wouldn't selling the bonds (reducing the balance sheet) have a similar effect as raising rates?

ExpertiseAsia's picture

3% may be the trade of the year, if you can get it...

Asia morning piece here.


Nomad Trader's picture

Call me old fashioned but I really feel this is the year when the cost of money finds its own (higher) level, despite what the agenda wants it to be.