If the Fed has an enlarged balance sheet and needs to reduce it
by reducing their bond inventory @ top dollar to regain their cash positions, then obviously an "event" would have to occur to increase demand for their bonds...hence an upcoming "Black Swan" situation?
It would also help keep interest rates down which would help housing and consumer spending...there can be no other solution that would make sense to exit QE while keeping the U.S. fiscal situation intact...right?
They can keep them (bonds) until they mature, but because they're buying them at such a low yield, they'll need those yields to stay low for a very long time, if yields climb their BS will get crushed as well as their credit rating.
Correct-Do you think the Federal Reserve is going to sit idly by and watch their balance sheet of Treasuries shrink in value? Doubtful-They will raise the Discount and Federal Funds Rate in response and that is them merely being pulled forward by the market itself.
or perhaps not even a Black Swan type of event, but a series of events that they are already anticipating...Debt ceiling sell-off, Iran bombing, or even something contrived by the Fed and U.S. Govt., but the Central banks aren't in the business of losing, money...hence SOMETHING as to happen to drive up bond prices IMO.
For now, you have to assume the sea of liquidity determined the way this year began, with treasury selling (and appl selling) and proceeds going into all equities large and small. These exaggerated moves seem to be a result of urgent hedge fund involvment to get the new year rolling.
Further out, you raise an Interesting premise and although I'm not a big conspiracy guy, the Fed is truly painted in a corner if yields go into a sustained rise. An exogenous event to create anxiety and a return to the safety of treasuries is something to ponder.