Why bank bonds are sitting ducks in the next downturn

Two years ago I developed a thesis about the negative effect of the Federal Reserve's interest rate policies on bank balance sheets based on my understanding about the history of zero rates in Japan. For bank bond investors, this should be worrisome.

In November 2010, I wrote a post noting that the long end of the yield curve would come in due to the Fed's zero rates, flattening the yield curve and compressing interest margins. This is what we witnessed in Japan in the aftermath of their housing bubble and the result was zombie banks made especially vulnerable during downturns. See my August 2011 post on toxic zero rates that spells all of this out in greater detail.

The point, of course, is that while the Fed is desperately trying to engineer a recovery by reducing debt burdens for ...


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