In the context of the typical question "How can the Fed ever lose control of the bond market, since they can always print more money?", today's Ask Fleck had a submission that probably spells out the answer...
Specifically, there is a quote in the most recent Barron's from Bill Gross:
"Years of easing by central banks mean that interest rates in most of the developed world will fluctuate narrowly. That offers an opportunity to sell volatility to create return. If you bought a 10-year Treasury bond today and nothing changed, you would get a 1.9% yield. If you bought a seven-year German Bund, you’d get zero. If, however, you sold a three-month call or three-month put on that same Treasury with a 20-basis-point [hundredths of a percentage point] variation—in other words, the yield stayed in the range of 1.7%-2.1% for three months—the trade would produce an annual return of 6%, as opposed to 1.9%.
The risk is that interest rates will go up or down by more than 20 basis points over a three-month period. But my premise is that central bankers will do anything possible to contain interest-rate fluctuations. The sale of volatility is producing the predominant amount of return in my fund."
The reader goes on to suggest (reasonably) that if Gross is pursuing this strategy, then plenty of other money managers are as well. Which leads to his pertinent insight:
"You've been asked over the years how the fed could ever not control the outcome in the bond market (in so many words). After all, can't they just print money and buy bonds? Well, trillions upon trillions of notional bond money, leveraged and selling volatility on top of it? That's how - they will be totally overcome when the time comes as these managers are forced to deal with portfolio problems all at the same time. Again, it's not today's business, treasury bond yield will likely move lower, perhaps much lower, during a nasty equity bear market (see Europe and Japan). But that would likely reinforce this behavior in the bond market of selling vol on leverage. If ever there were a coiled spring the Fed would be unable to deal with this is it..."
