Tags: Fed | Treasurys | bonds | losses

Fed Has Lost $151 Billion in Bond Values

By    |   Friday, 28 June 2013 07:55 AM

The Federal Reserve has lost at least $151 billion over the last seven weeks due to falling values of its $3.3 trillion bond portfolio, Fortune estimates.

And that could end up costing taxpayers.

Because estimating the value of the Fed's bond portfolio is tricky, its $151 billion figure could be off, Fortune admits.

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As of May, the Fed reported holding $1.9 trillion in Treasurys and $1.1 trillion in mortgage bonds, but it does not release the precise duration of its bonds, which is needed to accurately calculate bond values. It only groups its Treasurys by durations of one to five years, five to 10 years and over 10-years.

Fortune multiplied the average duration of the Treasurys by the change in rates for each category in the last seven weeks to conclude their value dropped $127 billion.

Calculating the value of its mortgage bond holdings is even more difficult because few homeowners keep the same loan for the full 30-year term. They typically pay off the mortgage when they refinance or sell the home.

Fortune applied the change in the Barclays mortgage-backed securities index, which has dropped 2.2 percent since May 2, to the Fed's $1.1 trillion mortgage bond portfolio to compute a loss of $24 billion.

Losses could be much larger if durations are longer. And they may continue to mount as rate continue rising.

However, the bond losses may not ultimately cost taxpayers anything.

The Fed doesn't count losses like commercial banks. Accounting rules require banks to mark-to-market such changes in their bond values. But the Fed does not have to realize those losses.

And under its deal with the Treasury Department, the central bank can postpone paying off those realized losses until it's again profitable.

Plus, the Fed would really only lose money if it sold the bonds. It could keep the securities until they are repaid, earning interest income while it holds them.

In fact, the Fed has not sold any bonds — mortgage securities or Treasurys — in more than 10 years, according to Forbes. Under its deal with the Treasury, it puts the paper losses in deferred asset account, which it pays off with interest payments from its Treasurys.

"The market will not care [about the losses]. It did not care about the [European Central Bank's] holdings of Greek, Portuguese, Spanish and Italian bonds last year when they were sitting on massive unrealized losses and probably in a negative equity position," James Bianco of Bianco Research told Forbes.

"Why should it be any different with the Fed?"

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Economy
The Federal Reserve has lost at least $151 billion over the last seven weeks due to falling values of its $3.3 trillion bond portfolio, Fortune estimates.
Fed,Treasurys,bonds,losses
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2013-55-28
Friday, 28 June 2013 07:55 AM
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