Report doing the rounds from Credit Suisse

Emergency moves by the Fed to boost reserves won't be enough to keep rates under control according to a note from Credit Suisse analyst Zoltan Pozsar that's doing the rounds.

"The Fed's liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn," he wrote in the note.

Pozsar is a market plumbing export who was formerly at the Fed and Treasury. He says it will be a true move back to buying bonds as yields spike.

"Year-end in the [currency] swap market is thus shaping up to be the worst in recent memory, and the markets are not pricing any of this," he wrote. "The apparent lack of concern may come from last year's benign experience and that repo rates have been trading normally since the September blowout. But these facts are less relevant than they seem."

He warns that the FX swap market might come unglued.

"If we're right about funding stresses, the Fed will be doing 'QE4' by year-end: the safe asset - U.S. Treasurys - is funded by [relative value] hedge funds on the margin and if the FX swap market pulls balance sheet and funding away from them, the safe asset will go on sale. Treasury yields can spike into year-end, and the Fed will have to shift from buying bills to buying what's on sale - coupons," he wrote.

The spot to watch will be FX swaps:

In our view, the FX swap market is expecting too much similarity between the current year-end turn to last year's turn. That's a mistake as last year's dynamics were different: (1) large U.S. banks still had excess reserves to lend, but this year they do not; and (2) they got a G-SIB [global systemically important banks] relief from a 20% fall in equities, but this year end they do not. Lower G-SIB scores allowed large U.S. banks to spend their hoards of excess reserves on more complex trades like FX swaps, and the year-end turn went down as a non-event - in FX swaps, but not repos. Recall that repo printed at 6.5% on December 31st spot. This year may be the opposite.

Ultimately, he says it will result in a jump in Treasury yields that spills over into risk assets including equities. He warns that it will get worse if/when equities rise in December.

The FX swap market could be the trigger of forced sales of Treasuries around year-end, and these funding market stresses will likely pull away capital and hence balance sheet from equity long-short strategies which could spill over into a broader equity selloff...