Wednesday, May 31, 2023
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Fed's QT set to 'full speed ahead' as central bank shrinks $9 trillion portfolio

(Bloomberg) – The Federal Reserve is set to accelerate its balance sheet reduction this week, meaning the central bank will finally start selling the Treasury bills it began accumulating nearly three years ago.

As part of a broader plan to shrink its $9 trillion portfolio, the Federal Reserve will raise its monthly cap on its holdings of maturing U.S. Treasury securities and mortgage-backed securities to $60 Billion Dollars and 35 Billion Dollars, using both its $326 Billion Treasury bills as filler when coupons run below monthly levels. September will be the first month the notes will be redeemed, as the coupons will be below the monetary authority’s new cap.

The Fed’s portfolio has $43 600 million Treasury bills due in September, which means officials also need to release 4 billion dollar bills. It also needs to shed another $600 million in October . This would be the largest decline in the note portfolio until September 2023.

It does not own any securities due to the last so-called quantitative tightening by the monetary authorities. It is also crucial for currency market traders who have been struggling to find assets to invest in. They have largely opted to keep their excess cash in reverse repurchase agreement facilities, and an across-the-board drawdown of Fed Treasuries would provide investors with plenty of supply.

Gennadiy Goldberg, a strategist at TD Securities, said: “This is the first time the Fed has allowed bills to flow out of the balance sheet, which they started buying quickly three years ago due to a shortage of reserves.” QT is going all out.”

Reserves fell below system comfort levels in September 16 Fueled disruptive spike in repo rates , the cornerstone of the short-term financing market. As a result, the Fed began buying roughly 16 $1 billion in Treasury bills a month to increase its reserve balance — in addition to conducting day-to-day repo operations.

While the central bank is expected to buy bills in the 2020 second quarter, economic turmoil from the pandemic has sparked a wave of fiscal and monetary policy stimulus , flood the financial system with cash and ensure adequate reserves. The difference is that the Treasury has since scaled back the supply of bills, creating an imbalance that left short-term investors with few options other than the Fed’s RRP.

The supply of bills has finally started to edge higher, and it is believed that there is still not enough to meet demand. Wall Street strategists expect that as the pace of rate hikes by the Federal Reserve slows and the Treasury Department continues to increase the number of Treasury bills it issues, this will lure reticent investors away from the RRP haven and back into the market.

Wrightson said weekly and monthly note holdings will not affect the market supply of notes as the Treasury incorporates redemptions into its quarterly lending program. ICAP (London: NXGN). There are long-term concerns because the Fed lends fewer securities to traders in its day-to-day operations, which would hinder their ability to cover short positions and make borrowing in the repo market more expensive.

Wrightson ICAP economist Lou Crandall wrote in a note to clients on Monday: “From a cash market perspective, when the first bill happens on Thursday, everything is Will not change.

©2022 Bloomberg LP



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