We have long pleaded that with a DV01 of almost $1 billion, all of it unhedged, the Federal Reserve is massively exposed to portfolio losses (courtesy of the Fed's recent transformation into the world's largest hedge fund) should interest rates commence rising. Well, sure enough after a well over 1% rise in rates in the past few months, and specifically since the advent of QE2, once the market started calling the Fed's bluff for further monetary easing, the losses incurred by the Fed are sufficiently large to where people should start asking questions. John Lohman quantifies just how substantial the unrealized portfolio damage to the taxpayer balance sheet has become since Ben Bernanke top ticked rates almost to the dot with his launch of QE2.
If, in the spirit of antimatter, Jack Schwager were to compile a book entitled “Market Anti-Wizards”, chapter one would surely feature none other than The Bernank. How else to describe Uncle Ben’s trading prowess as evidenced in the chart below. Since that fateful November 3rd announcement that quantitative easing would be expanded, the Federal Reserve has lost roughly $46 billion in Treasury and Agency paper (note that this does not include the Fed’s MBS holdings, which have likely suffered similar losses). Indeed, QE2 may go down as one of the greatest top-ticks in trading history.
The American public can rest assured that Chip Kenyon, Tom Baldwin, and Hardy Brumfield are on the other side of their tax dollar trade.