So fed funds will remain at all time lows but all other yields should expect to increase, right? What is going to stop large banks from attaining cheap capital and using the proceeds to buying higher yielding securities? Also, does it sit right with anyone that fed funds diverges from all other FI?
This should, in theory, cause a steepening of the curve, yes.
And what would stop banks from obtaining cheap capital in the short and lending in the long? You do realise this is the underlying business model of a bank, right? In any event, excessive risk taking with duration mismatch should be limited by prudent risk management, though obviously that’s not alway the case.
It’s been a while since my studies on central banks, their dual mandates, and what is off limits, but my dissent comes from the latter of the bank model. I have a problem when they are able to partake in arbitrage by procuring near zero interest rates then investing in govt securities that yield higher.
Having said this, my days of reading ZH and fighting the fed are over. My 401k is levitating on this life support and i will continue to pop champagne on the premise of good times. Free money to all and to all a good night!
That’s not arbitrage though, you’re taking on the risk of rising rates. Rising rates impact higher duration securities more financing in the short and lending in the long is a risky activity that deserves compensation. The amount of that compensation is obviously fair fodder for debate.
I don’t think the Fed holds the securities as trading. So they only realize the losses of rising rates in liquidiation.
I am actually offended by this response lol.