The yield on 10-year U.S. Treasuries has surged some 47% year to date.
Bond investors, especially those with jumbo-sized positions, are getting hammered. How much money has the Federal Reserve lost?
At the end of July, the Federal Reserve held $1.98 trillion in U.S. Treasuries. That figure represents just over half of the Fed’s $3.6 trillion balance sheet.
“Our estimate shows that the spike in bond yields since the first quarter of this year has caused a mark-to-market loss of $192 billion on the Fed’s holding assets, equivalent to approximately all of the unrealized gains that the Fed had accumulated since it began to implement quantitative easing in late 2008,” according to Scott Minerd, global chief investment officer at Guggenheim Partners.
“Although in keeping with their own accounting principles the Fed does not record mark-to-market losses, a continued increase in bond yields would incur actual losses should the central bank decide to sell assets,” Minerd explained.
Leveraged short Treasury ETFs, like the ProShares UltraShort U.S. Treasury 20+ Bond ETF (TBT) and the Direxion Shares U.S. Treasury 20+ 3x Bear Shares (TMV) have jumped between 16% to 22%% over the past six months.
That’s not bad considering the fact that the total U.S. bond market (AGG) has lost 3.94%, while long-term U.S. Treasuries have fallen an even harder 10.28%. (Year to date, the iShares Barclays TIPS Bond ETF (TIP) has dropped about 8%, while the Vanguard Total Bond Market ETF (BND) has weakened by about 4%.)
Granted, Bernanke & Co. does not value its portfolio on a mark-to-market basis. But the surge in interest rates has already erased almost $200 billion in the Federal Reserve’s capital.