Fed Official: A Panic Could Hit the Treasury Bond Market
Top bank officials are now admitting that the current financial structure is very unstable.
An event that should occur only once every 1.6 billion years. according to mathematical models used by the Federal Reserve and top banks, occurred on October 15, 2014.
On that day, FT reports, Treasuries see-sawed dramatically, seemingly on little news. The yield on the benchmark 10-year US government bond, slid as much as 33 basis points to 1.86 per cent before rising to settle at 2.13 per cent.
Simon Potter, executive vice-president of the Federal Reserve Bank of New York, warned in a speech on Monday that the unintended consequences of regulatory and market changes could mean that “that sharp intraday price moves" are no longer 1.6 billion year events but could become more common in the future.
This wasn't the first warning by a top bank official. As I reported last week, Jamie Dimon, the head of JPMorgan, highlighted the October 15 “flash crash” in his annual letter to his shareholders, and said that it constituted a “warning shot across the bow”, attributing the sharpness of the moves to regulatory changes that encourage the hoarding of Treasuries and discourage banks from helping to cushion sharp moves in bond markets.
In the EPJ Daily Alert, I am advising subscribers to maintain very high cash levels, because of such potential dramatic future events and I am also advising that long term bonds be completely avoided.
A careful reading of Federal Reserve released minutes indicates that the Fed itself has no clue as to how things will develop in the markets. We are in extremely dangerous and uncharted waters.
This is not going to end pretty.