Courtesy of Pam Martens.
James Bullard, President of the St. Louis Fed
The frightening “L” word is now making the rounds on Wall Street, resurrecting fears of the early days of the 2008 financial crisis. According to Wall Street veterans, liquidity has dried up in finding buyers for what hedge funds are desperate to sell: large blocks of lower rated bonds.
Since Federal Reserve Chairman Ben Bernanke held his press conference on Wednesday, June 19, of last week, hedge funds have been stampeding to unwind trades, driving down the value of not just bonds, but stocks, exchange-traded funds (ETFs) and gold as well. Even U.S. Treasury notes, the typical safe haven amidst panic selling, have lost significant value. The Treasury selloff is likely a result of the liquidity of the instrument; when hedge funds must raise cash quickly to meet margin calls and there are no bids for some of their other asset holdings, they have no choice but to sell the most liquid investments.
It also didn’t help that Bernanke made his remarks the week before the U.S. Treasury was set to auction $179 billion of Treasury bills and notes. The increase in interest rates resulting from the panic selling has forced the U.S. government to offer higher interest rates on its debt auctions this week.
Bernanke, a man of measured words, clearly did not mean to set off a panic. So what was it that the bond vigilantes found so repugnant in Bernanke’s press conference of June 19:
First, Bernanke said the Fed might actually sell some of its holdings of mortgage backed securities at some point: “One difference is worth mentioning. While participants continue to think that, in the long run, the Federal Reserve’s portfolio should consist predominantly of Treasury securities, a strong majority now expects that the Committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy, although in the longer run, limited sales could be used to reduce or eliminate residual MBS holdings.”
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