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

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...