iBankCoin
18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
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Markets Take a Dive After Fed Announces Balance Sheet Unwind to Begin Shortly

The perennial bear at Zerohedge pointed to a recent analyst note, warning of a balance sheet unwind. Naturally, it’s cataclysmic.

“If Bonds Are Right, Stocks Will Drop Up To 20%.” This point can be summarized simply as follows: there is $1 trillion in excess TSY supply coming down the line, and either yields will have to jump for the net issuance to be absorbed, or equities will have to plunge 30% for the incremental demand to appear.

An unwind of the Fed’s balance sheet also increases UST supply to the public. Ultimately, the Treasury needs to borrow from the public to pay back principal to the Fed resulting in an increase in marketable issuance. We estimate the Treasury’s borrowing needs increase roughly by $1tn over the next five years due to the Fed rolloffs. However, not all increases in UST supply are made equal. This will be the first time UST supply is projected to increase when EM reserve growth likely remains benign. Note both the 2003-06 and 2009-13 increase in UST supply were met with the largest increase in Chinese buying of USTs. With this unlikely to repeat, we believe price sensitive buyers need to step up.

Our analysis suggests this would necessitate a significant rise in yields or a notable correction in equity markets to trigger the two largest remaining sources (pensions or mutual funds) to step up to meet the demand shortfall. Again, this is a slower moving trigger that tightens financial conditions either by necessitating higher yields or lower equities.

The Fed didn’t hike rates this meeting, but they did announce they’ll be unwinding their $4.5t balance sheet starting in October — dubbed ‘balance sheet normalization’. She did say, however, they’ll likely hike once more in 2017.

She said the balance sheet will be reduced ‘gradually and predictably.’

Here’s Yellen trying to explain the Fed’s tight monetary policy, saying she was puzzled by the lack of inflation — chalking it up to ‘transitory’ circumstances.

Markets are not greeting this news with joy and glee. Stocks have taken a dive and the dollar is ripping v the euro, +0.98%.

On the downside, as could be expected with dollar strength, is gold — off by 0.7% — reversing today’s gains.

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7 comments

  1. speerothekid

    Whether you eat meat like a predator or vegetables like a prey animal, you’re still the same decaying organic matter as everything else.

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    • Dr. Fly

      You seem to be commingling the savage world of the animal and the intelligent one of the human. Steve Jobs ate only carrots for a month. Would you consider him a ‘prey animal’ or a predator?

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      • bob smith

        I consider Steve Jobs a decayed corpse and I’m never eating carrots again.

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    • dawg

      Didn’t he turn orange?

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  2. it is showtime

    All you need to know
    Is vix chart 1p to 2p

    That is how scripted, and controlled, qe post qe equities are
    Vindicating much: of what stock-conspiracy theorists said
    And, creating such massive dislocations and displacements

    collapse part 2, boombust #3, bear wave 2, are inevitable

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  3. hedge500

    Why do we sit here and anxiously await what an unelected power decides to do to our money, finances, and way of life?
    This entire year I feel like I’m taking crazy pills. I’m ready to move to Noway.

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  4. gappingandyapping

    So basically we would lose 6 months of straight up gains? OH THE HUMANITY! If it starts in another 6 weeks then we will be up another 10% so really not much loss at all. Time to BTMFD in $XIV.

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