Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.
Recently, Sweden's Riksbank acknowledged the need for a public bailout, citing technical insolvency, which has stirred significant public concern, particularly affecting confidence levels. Like many commercial banks, the central bank's negative equity stems from bonds bought between 2015 and 2021, which devalued as interest rates spiked in 2022. Consequently, the Riksbank faces intense scrutiny over its continued independence amid a crisis of public trust.
As for the Federal Reserve's solvency, it's better shielded thanks to an accounting measure that treats such losses as a deferred asset, expecting future positive net income to first offset this balance before any Treasury remittances resume. Some very “creative” accounting.
Despite the Federal Reserve's balance sheet showing longer-term assets typically outyielding its short-term liabilities, the sharp interest rate increases in 2022 have led to an unusual scenario. Since September 2022, the interest paid on reserves and reverse repos, now over 5%, exceeds the yields on older, lower-interest securities. Interest expenses have surged, eclipsing the interest income, as highlighted by the leap from $5.7 billion in 2021 to $102.4 billion in 2022 and will be much higher when the Fed reports in January of 2024 for 2023. These dynamics are reflected in the Fed's substantial holdings of low-yield securities acquired during the pandemic, with remittances to the Treasury currently at a deficit of $116.882 billion.
So far the Fed has maintained a level of public confidence unlike the Riksbank, which truly bends the brain at times.
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