The bond market tumult that has sent real-world borrowing costs surging is unlikely to deter the Federal Reserve from pressing onward with shedding nearly $100 billion of bonds each month from its $8 trillion balance sheet, analysts say.
That’s because even as yields have surged and sparked new fears over a potential recession, the move has been relatively orderly even if it's been outsized. Key measures of bond market volatility and liquidity are not flashing the warning signs they did just this past spring when Silicon Valley Bank failed and forced the Fed to launch a new emergency bank lending facility.
Since June 2022, the Fed has allowed more than $1 trillion of bonds to mature from its portfolio, including roughly $840 billion of Treasuries. Alongside the 5.25 percentage points of Fed interest rate hikes delivered since March 2022, QT is meant to withdraw stimulus from the economy, although officials stress that rates are their primary tool.
And the market pressure is real: In the two weeks since the Fed's last meeting, the 10-year note yield shot up by more than 50 basis points to nearly 4.9%, including a 15 basis point leg higher on Friday after nonfarm payrolls growth for September came in at close to double what was expected. A closely watched index from Goldman Sachs showed U.S. financial conditions near their tightest for the year on Wednesday.
“We didn't get a lot of warning last time,” UBS strategist Michael Cloherty said Thursday at an event held by the Bank Policy Institute, a Washington lobbying group. When reserve scarcity hits this time, “I think we're just going to slam into” it with little warning.
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