Material Risk.

News Items. Part 2. 11 October 2022.

News Items covers four subjects: (1) World in Disarray, (2) Financialization of Everything, (3) Advances in Science and Technology, and (4) Electoral politics, foreign and domestic. Six days a week, not Sundays. Weekdays by ~6:45am ET. Saturdays: sometime in the morning, usually.

1. Everywhere you turn, the biggest players in the $23.7 trillion US Treasuries market are in retreat. From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month. If one or two of these usually steadfast sources of demand were bailing, the impact, while noticeable, would likely be little cause for alarm. But for every one of them to pull back is an undeniable source of concern, especially coming on the heels of the unprecedented volatility, deteriorating liquidity and weak auctions of recent months. (Source: bloomberg.com)

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2. The Federal Reserve is posting its first operating loss in years as interest rates soar and demand for US bonds craters. Fed data show the central bank reporting earnings remittances due to the US Treasury of negative $2.9 billion as of Oct. 5. It’s a stark, though not unexpected, turn of events for a central bank which made billions in extra interest income from its expanding balance sheet in the years since the financial crisis. Of course, the Fed isn’t a “normal” investor. It cannot go bankrupt and any operational losses stemming from its vast portfolio of bonds will simply mean it remits less money to the US Treasury. But it does highlight the dramatic shift in the economic environment and could make for uncomfortable optics at a time when the Fed is already under pressure to bring down inflation. (Source: bloomberg.com)

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3. The Bank of England has widened its emergency bond-buying program to include inflation-linked gilts in its latest attempt to stem “fire sales” by pension funds that have created a “material risk to UK financial stability.” The central bank said on Tuesday it was prepared to buy up to £5 billion a day in index-linked UK government bonds as it warned of “dysfunction” in the gilt market. Its new intervention marks the first time it has purchased index-linked debt as part of its bond-buying schemes. The latest measures, which were announced just before the opening of markets in London, come just a day after the BoE unveiled a new short-term funding program that it hoped would act as a pressure release valve for pension schemes that have been caught up in a vicious circle after chancellor Kwasi Kwarteng’s September 23 “mini” Budget set off a historic sell-off in gilts. (Source: ft.com)

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