Fra Zerohedge:
Is ‘the committee to save the world’ about to ‘unsave the world’? Not according to The Fed who see their balance sheet unwind as boring a “watching paint dry.”
Of course, aside from the fact that The Fed has been unable to forecast its way out of a paper bag for decades, more than a few market participants believe otherwise, including BofA who recently warned…“the paint may be drying but the wall is about to crumble.”
“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.
However, we’re sure that Janet Yellen, just months away from leaving the sinking ship, will calm all fears during today’s press conference…
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