The Real Reason The Fed Lowered Interest Rates

Most banks hold their capital in US Treasuries, the highest-rated of all available investment options. A look at the capital account of most banks will reveal a number of US Treasury Bills, Notes, and Bonds. Generally, the Bank will calculate its current capital position by adding up the current quote of its portfolio of US Treasuries and any other capital position (like cash or corporate bonds), taking appropriate adjustments, and providing its Regulator with the current capital position of the Bank.

Here’s the rub. As any bond investor knows, the past couple of years have been one of the worst bear markets in bonds. Remember, the price of bonds is INVESRSLY related to the yield. As yields rise, the price of bonds (and notes and, to some extent, Bills) falls.