The Yield Curve Twist Omen

First there is the fixed schedule of the FOMC meeting. The next one will be on Tuesday 21st, September. In order to prevent the market crash on Sept 17th they would have to call an emergency meeting which would increase the angst on the market. Moreover the FOMC has been divised and indesicive lately so it is doubtful that they can reach a bold decision very fast.

Second the QE concerns specific classes of bonds and it is probable that even if they acted on treasuries and MBS the action would be ineffective on corporate bonds and would even widen the spread and increase the perceived risk.

Third the increase in the slope of the yield curve may be interpreted by the Federal Reserve System as a measure of a greater confidence of market participants. (confer above The Yield Curve as a Leading Indicator.)

Risk management involves judgement as well as science, and the science is based on the past behavior of markets, which is not an infallible guide to the future.

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The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.

In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to "get up and dance", as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share.

Instead, they gambled that they could keep adding to their risky positions and still sell them out before the deluge.

Most were wrong.