Monday, July 15, 2013

The One Chart Explanation Behind Ben Bernanke's "Open Mouth Operation" Scramble

by Tyler Durden

Two months ago Ben Bernanke, using his trusty mouthpiece Jon Hilsenrath, floated a trial balloon that a tapering of bond purchases is coming, necessitated by the drop in gross US TSY issuance and lower deficit funding need (maintaining the status quo ante rate of monetization would lead to even more deliquification in the bond market as Bernanke soaked up even more high quality collateral from the market). What happened next was not quite what Bernanke expected: a surge in bond yields that matched the dreaded 1994 episode...

... and instead the much needed steepening, so critical to banks whose prop trading abilities have been severely curtailed, the TSY curve bear flattened resulting in even more pain for banks.

How much pain? Enough for Bernanke to engage in the most dramatic Open-Mouth Operation scramble in recent Fed history to assure markets that while buying stawks is encouraged and a matter of Fed policy, selling bonds is certainly not on the Fed's agenda nor endorsed by the Fed's markets desk.

The pain that banks have experienced can best be seen in the following chart showing the latest update in "Net unrealized gains (losses) on available-for-sale securities" from the Fed's weekly H.8.

Two things come to mind (as previewed two weeks ago):

  • For the first time since April 2011, unrealized gains in AFS portfolios among the entire US banking sector became losses, and 
  • The two month rate of loss creation in MTM exempt AFS portfolio soared to the highest in series history.

Except even more Fed jawboning until the black line above finally moves back up.

See the original article >>

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