Jeremy Stein, Fed Governor, Made a Very Good Trade

(Originally published here.)

Every year, the Federal Reserve releases the financial information of the men and women serving on its Board of Governors. Yesterday, the Washington Post’s Neil Irwin pointed out a few fun facts such as the value of Janet Yellen’s stamp collection, which the Economist reports was one of the best possible places a saver could have placed her money over the last decade.

Earlier today, a financial analyst at Stone Street Advisors who goes by the alias “Dutch Book” (a reference to a portfolio of bets that is guaranteed to make money because the odds allow for arbitrage), pointed out something else that strikes me as even more interesting: Jeremy Stein, a relatively new Fed governor who was previously a professor of finance and economics at Harvard, made a very clever trade in the middle of last year. In particular, he sold off his Treasury Inflation Protected Securities and replaced them with short-term debt issued by investment-grade companies. (You can see the details on page 5 of this PDF.)

The accompanying chart shows the relative performance of the two Vanguard funds that Stein used to execute this trade. TIPS are the white line and the short-term paper is the yellow line.

Source: Bloomberg.

Source: Bloomberg.

As you can see, he avoided losing about 10 percent of his money as a result of this asset allocation decision. According to the disclosure form, that would have amounted to a net gain of as much as $50,000 relative to what would have happened in the absence of the trade.

There is nothing to suggest that Stein did anything improper. However, it is amusing thatthe most articulate skeptic of asset purchases is also the man who profited from the recent rise in real interest rates.

Update: A spokesman from the Federal Reserve reached out following the publication of this article with some additional details. First, Stein sold his TIPS holdings a few days before officially becoming a Fed governor. Moreover, he did so in order to comply with the Fed’s ethics guidelines, which limit the amount of savings that can be held in U.S. government securities with maturities greater than one year. In other words, Stein’s gain was mostly due to lucky timing, not foreknowledge.

(Some skill may have been involved in his decision to replace an intermediate-maturity bond fund with one that only held short-term securities. Short-term debts are less vulnerable to losses caused by rising interest rates.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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