| Friday, March 18, 2022 | ||||||||
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 03/11/22 | 0.17 | 0.40 | 0.78 | 1.22 | 1.75 | 1.91 | 1.96 | 2.01 | 2.00 | 2.45 | 2.36 |
| 03/14/22 | 0.23 | 0.45 | 0.86 | 1.28 | 1.87 | 2.04 | 2.10 | 2.16 | 2.14 | 2.56 | 2.47 |
| 03/15/22 | 0.22 | 0.46 | 0.86 | 1.28 | 1.85 | 2.04 | 2.10 | 2.16 | 2.15 | 2.57 | 2.49 |
| 03/16/22 | 0.24 | 0.44 | 0.86 | 1.35 | 1.95 | 2.14 | 2.18 | 2.22 | 2.19 | 2.56 | 2.46 |
| 03/17/22 | 0.20 | 0.40 | 0.81 | 1.30 | 1.94 | 2.14 | 2.17 | 2.22 | 2.20 | 2.60 | 2.50 |
Source: U.S. Department of the Treasury, as of 3/17/2022
A Walk Down Memory Lane
Wednesday’s Portfolio Manager’s Report was an excellent recap of the expectations of rate hikes in 2017 versus the reality of what actually happened. Increasing Fed Funds is the number 1 topic being discussed, but a close second is the Fed’s Balance sheet. The main question asked has been will the Fed sell securities or just reduce the amount purchased vs maturities. The Federal Open Market Committee (FOMC) Statement released yesterday touched on this. It stated, “…the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.” Powell was asked about reducing holdings in the press conference, to which he was quick to answer, the conversation in the committee is further along than expected and an announcement and perhaps the reduction could start as early as May. Powell did not mention the need to sell assets and said the unwinding would look “very familiar” albeit “faster than last time.”
In December 2008, the FOMC set the Fed Funds target range to 0.0%-.25% where it would remain for 7 years. In addition, Treasuries, Agencies and government backed mortgage securities were purchased increasing the Fed’s balance sheet from 900 billion (pre-recession) to 4.5 trillion at its peak. In September of 2017, the Fed announced the balance sheet reduction would begin the following month. To ensure a gradual decline, caps were set for the amount of bonds that were allowed to mature and not be replaced. The caps started at $6 billion per month for Treasuries and $4 billion per month for Mortgage Backed Securities and Agencies. The caps would increase by the same amount each quarter until they reached $30 billion per month and $20 billion per month respectively. In March of 2019, the Fed announced the cap on Treasuries would be reduced from $30 billion per month to $15 billion per month starting in May with a projected end date of September 2019. In August 2019, the Fed ended the runoff early having reduced the balance sheet $4.5 trillion to $3.8 trillion.
Understanding what “very familiar” looks like and taking into consideration “faster than last time” it seems a logical thought the 2022 unwind would either have larger caps for maturing securities or increasing those caps faster than quarterly but not would not involve selling their portfolio. The last thing the Fed wants to do is disrupt the market further, which is exactly what would happen if they tried to liquidate mortgage securities. It is very likely we will get more information when the Fed minutes are released on April 6.
In December 2008, the FOMC set the Fed Funds target range to 0.0%-.25% where it would remain for 7 years. In addition, Treasuries, Agencies and government backed mortgage securities were purchased increasing the Fed’s balance sheet from 900 billion (pre-recession) to 4.5 trillion at its peak. In September of 2017, the Fed announced the balance sheet reduction would begin the following month. To ensure a gradual decline, caps were set for the amount of bonds that were allowed to mature and not be replaced. The caps started at $6 billion per month for Treasuries and $4 billion per month for Mortgage Backed Securities and Agencies. The caps would increase by the same amount each quarter until they reached $30 billion per month and $20 billion per month respectively. In March of 2019, the Fed announced the cap on Treasuries would be reduced from $30 billion per month to $15 billion per month starting in May with a projected end date of September 2019. In August 2019, the Fed ended the runoff early having reduced the balance sheet $4.5 trillion to $3.8 trillion.
Understanding what “very familiar” looks like and taking into consideration “faster than last time” it seems a logical thought the 2022 unwind would either have larger caps for maturing securities or increasing those caps faster than quarterly but not would not involve selling their portfolio. The last thing the Fed wants to do is disrupt the market further, which is exactly what would happen if they tried to liquidate mortgage securities. It is very likely we will get more information when the Fed minutes are released on April 6.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
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