Surge in Long-Dated U.S. Bond Yields Not Driven by Fed’s Quantitative Tightening: Analysts
Fed’s Role in Rising Yields Debated
The recent surge in long-dated U.S. bond yields to their highest levels since 2007 has sparked debate among analysts about the role of the Federal Reserve’s quantitative tightening (QT) policy. While some argue that QT is not a major factor, others believe it is driving yields higher by increasing the supply of Treasuries in the market.
Composition of Fed’s Holdings
Analysts have observed that despite reducing its overall holdings of Treasury bonds and bills by approximately $840 billion since the launch of QT 2 in June last year, the Fed’s stash of bonds with a maturity of 10 years or more has actually grown. This increase in longer-dated securities has potentially helped keep borrowing costs from spiking even higher.
Record High Holdings
The Fed’s holdings of Treasury bonds with a maturity of 10 years or more have reached a record high of $1.5 trillion, accounting for 30.5% of all its holdings of bills and bonds. In contrast, its holdings of Treasury-issued debt with shorter maturities have declined.
No Shrinking of Long-Dated Securities
If the Fed’s holdings of longer-dated securities were decreasing like other parts of the yield curve, more of these bonds would be available to the wider market, potentially leading to higher yields. However, the Fed’s continued accumulation of long-dated Treasury bonds has prevented this outcome.
Debate Continues
Analysts remain divided on the impact of QT on rising yields. While some argue that the program’s effects have been well-flagged and thus may not be the primary driver, others believe that the increase in Treasury supply resulting from QT is contributing to higher yields.
Fed’s Balance Sheet Reduction
The Fed’s current round of QT involves reducing its balance sheet by up to $95 billion per month. Although the central bank has not sold any bonds back to the market, it allows some securities to mature without reinvesting, resulting in a decline in overall holdings.
Market Functioning Smoothly
Despite the rise in yields, the market has so far been functioning smoothly without signs of stress or liquidity issues. However, analysts caution that the increasing volatility could impact liquidity in the future.
Overall, the recent surge in long-dated U.S. bond yields has sparked a lively debate among analysts regarding the role of the Fed’s QT policy. While some argue that the program is not the primary driver of rising yields, others believe that the increase in Treasury supply resulting from QT is contributing to higher borrowing costs. The Fed’s continued accumulation of long-dated Treasury bonds has prevented yields from spiking even higher. The market, although functioning smoothly for now, faces potential challenges due to increased volatility.
