It’s very expensive to buy hedges when the event they’re protecting against is actively happening. The point would have been to find that counterparty ahead of the time and still pay a hefty premium.
If I’m taking the variable end of a swap and expecting interest rate hikes, I can use the spread I’m gaining to offset the damage to a portfolio I already have of shorter duration (thus: less interest rate sensitive) bonds.
Overall, the USG issuing trillions of dollars of low interest bonds and then raising rates is going to cause losses for bond holders throughout the system, but as long as those bonds are held, in aggregate, in portfolios and entities which won’t face liquidity crises until they mature, the loss can be borne.
There may also be more sophisticated ways of offsetting bond exposure, but I’m not familiar. I’m appealing more to the idea that this impact by the Fed is easy to predict, indeed exactly the point. Bond valuations drying up will reduce the multiplier and take money out of circulation. The system is supposed to remain capitalized (and/or hedged) to survive the stress and the Fed would be watching. Apparently some parts of the system weren’t. And there are calls for the Fed to slow down. And probably more evidence that banking regs need to remain strong.
If I’m taking the variable end of a swap and expecting interest rate hikes, I can use the spread I’m gaining to offset the damage to a portfolio I already have of shorter duration (thus: less interest rate sensitive) bonds.
Overall, the USG issuing trillions of dollars of low interest bonds and then raising rates is going to cause losses for bond holders throughout the system, but as long as those bonds are held, in aggregate, in portfolios and entities which won’t face liquidity crises until they mature, the loss can be borne.
There may also be more sophisticated ways of offsetting bond exposure, but I’m not familiar. I’m appealing more to the idea that this impact by the Fed is easy to predict, indeed exactly the point. Bond valuations drying up will reduce the multiplier and take money out of circulation. The system is supposed to remain capitalized (and/or hedged) to survive the stress and the Fed would be watching. Apparently some parts of the system weren’t. And there are calls for the Fed to slow down. And probably more evidence that banking regs need to remain strong.