Fed QT mix may be capping, not spurring, long yields: McGeever
By Jamie McGeever
ORLANDO, Florida (Reuters) -The recent surge in long-dated U.S. bond yields to their highest since 2007 has a few plausible triggers, but the Fed's quantitative tightening (QT) policy of reducing its balance sheet does not appear to be one of them.
If anything, shifts in the composition of the central bank's holdings of Treasury bonds since 'QT 2' was launched in June last year may actually be keeping longer-term borrowing costs from spiking even higher.
While the Fed has reduced its holdings of Treasury bonds and bills by around $840 billion in that time, its stash of bonds with a maturity of 10 years or more has actually grown, both in nominal terms and as a share of total holdings.
Indeed, it is now a record high by both measures — $1.5 trillion in nominal terms, up around $75 billion since QT 2 started; and 30.5% of all the Fed's holdings of bills and bonds, up almost 6 percentage points.
Fed holdings of Treasury-issued debt of all other maturity segments — bills, one-to-five years, and five-to-10 years — have declined to varying degrees, nominally and as a share of the total, particularly the one-to-five year part of the curve.
If the Fed's holdings of long-dated securities were shrinking like other parts of the curve, or even at all, more of these bonds would be available to the wider market. All things equal, these yields would probably be higher.
«It's at least reasonable and fair to raise the argument that the backup in long-dated yields doesn't owe to QT dynamics,» said Benson Durham, head of global policy and asset allocation at Piper Sandler.
Curiously, the Fed's holdings of longer-dated bonds as a share of the total also rose during 'QT 1' between October 2017 and July 2019, although
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