It could spark a repeat of the temporary yet troubling breakdowns the world’s most important financial market has suffered in recent years—on a bigger scale
CONSIDER THE life of a Treasury bill or bond. Typically once or twice a week, a slew of fresh Treasuries are born. Their first home is usually, briefly, an investment bank's dealing desk. Those dealers might hold onto a few for themselves, but generally distribute the bulk out to more permanent owners, like the bond portfolios of a mutual fund, a foreign government, a company or the Federal Reserve.
According to the minutes of its March meeting, released in early April, the Fed plans to reduce its balance-sheet not by actively making sales, but by letting bonds that have reached the end of their lives mature without buying a new bill or bond to replace them. By July, if all has gone to plan, the Fed’s portfolio will be shrinking by $95bn per month, split between $60bn of Treasuries and $35bn of mortgage-backed bonds.
It is also possible that QT will cause the Treasury market to malfunction—the second reason for concern. Its smooth running matters well beyond America: Treasury rates are a crucial benchmark for pricing virtually all other financial assets globally. And recent history is not encouraging.
A combination of financial-crisis stimulus, fiscal deficits under President Trump and pandemic-era splurge have caused the Treasury market to grow nearly fivefold since 2007.
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