It’s more complicated than that. They don’t just hold bonds that have diminished in value and are underwater, they are borrowing money through the reserve progr

It’s more complicated than that. They don’t just hold bonds that have diminished in value and are underwater, they are borrowing money through the reserve program at higher interest rates than they are collecting. It’s the exact thing that sank svb but on a much larger scale. In a normal environment they lend at a higher rate than they borrow and remit the excess to the treasury. Now they are having to borrow. This is another interesting dynamic in the Fed’s fight against inflation because ideally they’d like to actively sell some of their portfolio to increase QT but I’m not sure they can because of the losses they would be forced to realize. This is largely why they have taken a “passive” approach to balance sheet drawdown. For two years everyone bragged about getting 2.5% mortgages and now are loving collecting an easy 4.5% on six month bonds. But people forget there’s always someone on the other side of a trade and now that the tide is going out we are seeing exactly who they are.