Tonight, I’d like to expound on the recent musings from Chris Whalen, titled, “Bank Earnings &Volatility.” Whalen stresses that the FED will not be selling assets but merely ending “its reinvestment of cash when securities are REDEEMED,” (emphasis mine). In what I consider a key point raised, Whalen said, “Yet as we and a growing number of investors seems to appreciate, the FED cannot force up long-term rates so long as it is sitting on $4 trillion worth of securities THAT IT DOES NOT HEDGE. More given that the Treasury intends to concentrate future debt issuance on short-term maturities, downward pressure on long-term bonds yields is likely to intensify.” Whalen also said, “What the FOMC has done to the markets via QE is essentially reduce potential volatility by holding securities and not hedging these securities.” The key point is enhanced by the fact that both the ECB and BOJ do not hedge their security exposure either so volatility has been diminished by the reduced hedging.