Is The Fed's Rate-Volatility-Suppression Sowing The Seeds Of Its Own Destruction?

Tyler Durden's picture

It would appear the concerns regarding rising rates in the Treasury Bond market are overblown - no matter how much the inflation break-evens spike. Implied volatility for the Interest Rate market is practically at all-time record lows currently as the Fed continues to remove duration and high convexity assets from the market. One thing concerns us though - the velocity of spikes in volatility once it gets down to these levels has empirically been tremendous - though we are sure this time it's different. In fact this time is different, since this time it is the Fed (as majority owner) that faces the pain from the now-marginal Minsky-like seller of Treasuries running away from inflation-flares (or China/Japan tensions) - and what would Treasury do without that pass-through ponzi revenue from the Fed's winnings? Or as Taleb wrote: "There is no freedom without noise - and no stability without volatility."

Interest rate volatility is at record-low levels - and has seen dramatic spikes from these levels...(and this chart is log scale!!)


While the Fed is indeed non-MtM, the potential for trouble is the relative size of the compressed bubble bursting on Government interest expense should this vol signal the next implosion... How much longer can they hold this ever-increasing balloon under water?


Taleb's 'infamous' Black Swan Of Cairo article sums it all up...


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gjp's picture

BTFD is out in force again.  Even if there's no more surprises from the Fed, if they are clearly committed to supporting asset prices at all costs, why wouldn't you BTFD?

(of course I don't, but I'm wondering why not ...)

malikai's picture

I didn't BTFD because I was busy. But I should have..,m4h

slaughterer's picture

Today is a major lesson in market psychology:

Today's lesson:

Never forget to BTFD.  Simon has your back.  

Tomorrow's lesson:

Forget inflation hedges like PMs and oil.  Just buy stawks.  



slaughterer's picture

... Potter.  The new man in charge of PPT at NYFED since Brian Sack left.  


Fields of interest
Nonlinear Dynamics, Bayesian Methods, Time Series, Forecasting

Simon Potter is the Head of the Markets Group at the Federal Reserve Bank of New York. He received his Ph.D. from the University of Wisconsin-Madison, and has taught at UCLA, Johns Hopkins NYU and Princeton. His main research area is applied time series analysis using Bayesian methods. He has written extensively on nonlinear dynamics over the business cycles. Recent topics have included forecasting the probability of recession, large panel forecasting models modeling structural change and inflation expectations.

gjp's picture

Thanks!  Good to know your enemy

malikai's picture

They've been working on the oil lesson all week it seems. Can't wait for the finale: Margin Hikes.

slaughterer's picture

Can't wait for the PM flash crash.  (to buy more).

ThunderingTurd's picture

You don't because you are probably a rational person...simple as that. 

holdbuysell's picture

If the Fed owns the entire TSY complex and continues to buy everything going forward (it's already at 75%), seems to me it can dictate whatever interest rate it wants. It's understood this would ultimately result in the demise in the dollar once people catch on.

This would be consistent with Raoul Pal's assertion (though possibly from a different approach) that US rates would be stuck at 1% in his "The End Game" presentation from May.

Of course, there is that little problem called China which already owns a boatload. But, then, the Fed can simply print (similar to the Japan-China fiasco ensuing) and buy everything China (and others) dumps. Wouldn't surprise me if China is quietly selling to the Fed as we speak.

TheCanadianAustrian's picture

And Keynesians love to say that Austrians don't believe in empirical evidence. Yeah, we do. We just don't believe in bullshit extrapolated models based on nauseatingly insufficient data.

Jim in MN's picture



As long as you don't care about investment incentives, productivity, jobs and all that nonsense, it's no big deal to TOTALLY FUCK UP THE BOND MARKET.


Not with a bang but with a the now-hidden uncertainty (i.e. not priced via volatility) collapses corporate investment outside of the magic circle of state-owned enterprises, which in America includes all the corrupt hogs in defense, health care, and the FIRE sector. 

rufusbird's picture

I said it a post a few days ago and it bears repeating...

If there is a rise in interest rates, I can imagine a scenario where the Banks can survive it (by hedging and restructuring their portfolio), and I can also see moves the Fed can take and survive (by offloading the long term debt). But I can not come up with a solutioni where both the banks and the Fed portfloio survives.

Panafrican Funktron Robot's picture

The Fed Portfolio is a figment of imagination.  Think of it this way:  it would be like having a brokerage account, with unlimited cash.  Yeah, you could take trillions of dollars in losses, but that's different from actually being nominally insolvent.  There is no margin call for the Fed, at least until we get to the final collapse of the USD.  The TBTF banks won't have to survive anything, because they functionally run the Fed.  Rates rising?  Unload to the Fed balance sheet!  Shit man, we have unlimited QE.  These banks will not fail, unless by intentional design.

rufusbird's picture

Intuitively, I know your right. The Fed will not do anything that would hurt the banks. It is hard to accept because we have watched big banks fail, but not a central bank. At least here in the US in our life times. Maybe  that is why it is so hard to perceive. I think that is why watching Europe right now is so facinating. We are fortunate to get so much information and perspective here on ZH all in one place.

q99x2's picture

Yeah, it doesn't make sense that they would pay my expenses forever. I might have to get married again.