The famous Abbott and Costello skit “Who’s On first, What’s On Second, I Don’t Know is On Third” summarizes the current state of hot potatoes in the bond markets.
Of course we know who’s on first. Who? Exactly. The Fed. The Fed holds more Treasury bonds than any other Central Bank in the world. According to the Federal Reserve’s data, as of this month the Fed holds over 5 trillion dollars’ worth of Treasurys, compared to just over 4 trillion dollars held by all other foreign official buyers. As I have written before, the Fed also owns almost 25% of all TIPS (Treasury Inflation-Protected Securities), as they bought up more than the total issuance of TIPS to drive real yields negative in the last few years. And we also know that last month when pivoting Jerome Powell pivoted, the Fed essentially guaranteed that they would not be buying many more Treasurys in relatively short order; i.e. in March if you own TIPS you really better want to own them.
The full note on this important topic can be downloaded at this link: LTA Thinking- Why commercial Banks are a disaster in the making and what you can do about it