We are in Terra Incognito with respect to the Global Experiment in Fiat Currencies (GEFCON), and no one really knows what happens to financial assets once they cross the Event Horizon of the Fed (or any other Central Bank) and are duly transformed into...something else. The Fed (or insert your favorite Central Bank) takes Treasuries and distributes cash. Then what?
Switching back to more earthly concerns, what happens when the supply of collateral for most large financial transactions is artificially shrunk? Simple: the exchanges change the collateral requirements and begin accepting lesser form of collateral. This is most likely where the next big Financial dislocation will arise...the cascades of forced collateral sales once it is understood what precarious foundations the bond markets stands upon.
Its early...we are only at GEFCON 4, but there are some major risks going forward within the 3-5 year range.
JPMorgan estimates that the world's central banks and commercial banks alone now hold some $24 trillion worth of bonds - or 55 percent of the entire $44 trillion universe of government, asset-backed and corporate bonds as captured by Barclays Multiverse Global Bond Index.
What's more, these players hold more than two thirds of the government bond subset, which amounts to about $25 trillion.