Wouldn’t be surprised if the Fed does something like creating an SPV to buy all these bonds at par from distressed banks so they can keep hiking.
Discussion
Would it work theoretically?
theoretically yeah…the big issue is term mismatch. these banks need to sell bonds now to cover withdrawals, so they are forced to sell them at a discount which is eating into their equity. if they were held to term they wouldn’t lose nominal money. the Fed could step up and buy them at par and hold them to term.
Another new way for the fed to distort pricing of risk and adding more moral hazard to the immense pile it has already created.
This is exactly what they are discussing I think https://www.bloomberg.com/news/articles/2023-03-12/us-discusses-fund-to-backstop-deposits-if-more-banks-fail
I think this is something different, but perhaps i’m wrong
nailed it #[0]
👏
Even the keep hiking part?
If so then they’d just be devaluing their collateral and then what? Even more brrr?
we shall see if they continue hiking. i think they will.
If they hold the bonds to term then nominally they won’t lose money. they only have to recognize the devaluation if they sell before term, which they won’t.