November 26, 2022

Surprise! Another Month, Another Failed Attempt at QT

How long till the Fed follows in the BoE footsteps and re-enters the market, using “crisis mode” as the excuse?

The Fed has found it easier to raise rates than shrink its balance sheet. September was meant to be  the   month when the Given got serious about shrinking the total amount sheet.

After a few months of warming up with $47. 5B monthly reductions, the Given was going to step up in September and shrink by $95B ($60B in Treasuries and $35B in MBS).

In the prior four months, the Fed only hit the $45B focus on a single time –   last month . It should be no surprise then that September fell woefully lacking target, seeing only a $31B reduction. Even this meager run-off has created chaos within the Treasury market with the yield curve seeing pronounced volatility in recent weeks. Provided the environment, how long until the Fed follows in the BoE footsteps and re-enters the market, making use of “ crisis mode” because the excuse? Given  the particular mathematical impossibility the Treasury faces   within the months ahead, it won’t be too long!

Number: 1 Monthly Change by Instrument

The table below information the movement for the month:

  • The particular Treasury market only saw reductions in securities maturing in less than 5 years

    • Only $23. 2B rolled off, which signifies 38. 7% of the focus on

  • MBS was even worse with $11. 1B rolling away from which represents 31% of the target

Figure: 2 Balance Sheet Breakdown

Looking at the weekly data shows that the first two weeks of September (third and fourth from the right) were incredibly muted. It wasn’t until the last two weeks that the balance sheet saw any significant reduction.

Find: 3 Fed Balance Sheet Weekly Changes

The bond marketplace is mostly responding to the rate hikes, but the Fed’s attempt at QT will only exacerbate the carnage shown below. Factors have really accelerated within the last few weeks as shown by massive spike in produces below. This is an unprecedented move in a typically safe-haven market. And to reiterate,   this is with the Fed avoiding the QT it guaranteed to markets !

Figure: 4 Interest Rates Across Maturities

This is showing up in the yield curve spread involving the 10-year and 2-year. The particular curve has been strongly upside down since July 4th.

Figure: 5 Tracking Yield Curve Inversion

Looking at the whole yield curve shows how much has changed over the last month and year. The entire curve provides shifted up in the last 30 days by about 55bps and is nicely above and flatter than the at the same point last year. A number of maturities are popping above 4%!

Determine: 6 Tracking Yield Contour Inversion

Who Will Fill the particular Gap?

As the Fed leaves the market and enters as a seller, someone will need to step in and purchase the debt the Fed has been buying. The chart below looks at international holders associated with Treasury securities. International holdings continue to fall, though there was clearly a slight uptick in the latest month.

Customer still less than $1T plus Japan actually saw an extremely minor reduction MoM.

Note: Data was last published since July

Figure: 7 International Cases

The table below shows exactly how debt holding has changed since 2015 across different borrowers. The net change over the last yr is a reduction of $100B. The YoY reduction from both China and Japan can be seen clearly below.

Figure: 8 Average Weekly Change in the Stability Sheet

Historical Perspective

The final storyline below takes a larger watch of the balance sheet. It is clear to see how the usage of the total amount sheet has changed since the Global Financial Crisis. The tapering through 2017-2019 can be seen in the slight dip before the massive surge due to Covid. It’s extremely unlikely the new round of QT will last as long or even shrink the balance sheet just as much as it did in 2018. Furthermore, the current QT pales in comparison to the growth of the balance sheet seen in the latest QE binge.

During the last QT period, the Fed shrunk its stability sheet by ~15%. A similar reduction would be $1. 34T. Even  if   QT hits full speed at some point, it would take more than a year. Will the Fed continue QT as the economy flounders in economic downturn and potentially dips in to depression territory?

Figure: 9 Historical Fed Balance Sheet

What it means for Gold and Silver

The Fed has carried on to talk tough and deliver on promised rate hikes. Quantitative Tightening has been a different story though. The Given has failed to deliver in 4 of the last 5 months. The bond market is an absolute disaster so it shouldn’t be a surprise that the Fed is not really very trigger-happy.

The BoE stepped with this week to relaunch QE for a “ brief” time until it can get back to QT. The problem is that QE  is   the crisis. Thus, with every single new QE program, main banks will have to continue carrying out more or risk unleashing complete havoc.

Unlike the BoE, the particular Fed has escaped a major catastrophe so far. But it might be only a matter of time till something breaks. And even if a miracle does happen and no major event blows up in the next few months, the Given will still have to contend with the Treasury entering a debt spiral.

None of this bodes well, which is exactly why the Fed will relaunch QE sooner than most think. When the Given does pivot, gold and silver is going to be set to take-off. That’s once the market should finally understand that inflation is here to stay and there is nothing the Fed can do about it.

Data Supply:   and

Data Updated: Weekly, Thursday at 4: 30 PM Far eastern

Last Up-to-date: Sep 28, 2022

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