Goldman Sachs: Fed’s QT fueling Treasury volatility, hurting liquidity – Bloomberg

Meanwhile, the depletion of excess reserves within the system that stems from a reduction in the Fed’s bond holdings could result in upward pressure on short-term rates, such as the effective fed funds rate and Treasury bill yields, although those moves could be more pronounced in 2023 than in 2022.

The Fed is planning to wind down its buying of Treasuries by March, completing a process that market observers refer to as tapering, and could start shedding its holdings by attrition later this year. 

Fed officials, who are currently paving the way for a widely expected interest-rate hike in March, have yet to announce specific plans for balance-sheet reduction, but they did release a set of principles alongside the authority’s most policy decision indicating that it is looking to embrace the broad model it used last time it engaged in QT back in 2017-2019. 

Projections are most sensitive to the assumption that ‘levered investors will, over time, replace the Fed as the marginal buyer of USTs.’ Strategists don’t expect QT to ‘materially affect’ cross-currency bases.

Their projections are based on an assumption that the Fed will announce runoff plans in June, quickly ramp it up to a pace of around $100 billion per month and ultimately shrink the balance sheet by between $2.2 trillion to $2.7 trillion over a period of two to two-and-a-half years.