Letter: Who do you think had the biggest US bond expos­ure?

Published in the Financial Times.

“Long-dated bonds are still a dan­ger­ous place to be right now,” an investor in hedge funds is quoted as warn­ing in the report by Kate Duguid and Cos­tas Mour­selas “Hedge funds revive ‘Trump trade’ in bet on US bonds” (Report, July 19).

I would say he is right.

So who would you guess has the biggest naked risk pos­i­tion in very long-dated US bonds and mort­gage-­backed secur­it­ies, super-lever­aged, fun­ded short, and unhedged? None other than the lead­ing cent­ral bank in the world — the US Fed­eral Reserve.

As of July 17, the Fed owns — exclud­ing its pos­i­tion in short-term Treas­ury bills — the vast sum of over $6tn in Treas­ury notes and bonds and very long mort­gage-backed secur­it­ies. Of this sum, $3.8tn still has more than 10 years left to matur­ity, accord­ing to the Fed’s own report.

The Fed had a mark-to-mar­ket loss of over $1tn on its invest­ments in its most recent quarterly state­ment (March 31), against its repor­ted total cap­ital of $43bn. Quite a not­able example of asset-liab­il­ity man­age­ment!

Alex J Pol­lock

Senior Fel­low, Mises Insti­tute, Lake Forest, IL, US