The Federal Reserve reportedly has bought a significant number of U.S. Treasury bonds for the first time since October 2014.
The Fed recently purchased $14 billion in U.S. bonds, Schiffgold.com reported, citing an article by Econimica.
The $14 billion in purchasing is in stark contrast to the zero purchases and selling during Quantitative Tightening, Econimica said.
When the Fed sells Treasuries, asset prices struggle, but when the Fed buys Treasuries, asset prices have surged, Econimca said.
"Up until 2 weeks ago, it had been 250 weeks since the central bank bought a meaningful number of U.S. Treasurys. After ending QE3 in 2014, the Fed held its Treasury holdings stable at around $2.6 trillion until it began its balance sheet reduction efforts in late 2017. The Fed sold off Treasurys through 2018 and most of 2019, tapering off over the summer as it prepared to end QT this fall," the report said.
"It’s too early to say the Fed has definitively launched another round of QE. This could be an anomaly," the report said.
“Since March 2019, when the Fed rolled out its plan, the Fed has ended its Treasury runoff sooner than they had communicated, cut rates as they said they would not, and is buying mid and long-duration bonds while aggressively rolling off / selling off notes and bills…again opposite to what they previously communicated (insinuated). I think this is noteworthy!” the author of the Econimica article wrote.
To be sure, analysts have been expecting the central bank to launch such a strategy.
In May, Bloomberg reported that as soon as next year, "analysts say the Fed will resume large-scale buying of debt securities -- this time just U.S. Treasuries -- in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade.
“Of course, it won’t be called QE, which President Donald Trump has urged the Fed to restart. Rather than trying to drive down long-term interest rates to boost growth, the purchases are intended to replace the Fed’s mortgage-bond holdings gradually as they mature and to keep ample reserves in the banking system. But the effect, some say, will nevertheless be largely the same,” Bloomberg reported.
“For anybody that has been in the market for the last 10 years, it will feel like QE,” said Priya Misra, global head of rates strategy at TD Securities. “Once again the Fed will be the single largest buyer of Treasuries and (this time) in a non-QE world. This will be a very bullish Treasury-market dynamic.”
And what happens in the U.S. Treasury market may have lasting consequences for the broader economy. Not only do Treasury yields reflect how much the government pays to borrow money for an array of federal programs, but as the global benchmark for lending, they also determine the interest rates on everything from mortgages to auto loans and corporate debt. So the more the Fed bought and held during QE, the theory went, the cheaper it would ultimately be for consumers and businesses to take out loans.
During the post-crisis era, yields on 10-year Treasuries have averaged just under 2.5% -- roughly half the level in the decade prior to the financial crisis.
Monetary policy is “a little more stimulative today than it would have been pre-crisis because of these balance-sheet dynamics,” said Jay Bryson, global economist at Wells Fargo. The big takeaway for the average person is that, all else being equal, rates on mortgages and other long-term loans in the broader economy are slightly lower because of the Fed’s large debt holdings.
Granted, a lot of the bang from QE itself came from its “signaling effect,” which drove yields lower as investors anticipated the Fed’s purchases, says Lawrence Dyer, head of U.S. rates strategy at HSBC. Another caveat is the Treasury market has doubled in the past decade, so the impact of the Fed’s balance-sheet buildup isn’t likely to be as large as an actual quantitative-easing program. Relative to the size of the economy, the central bank’s bond investments will continue to be lower than they were during the height of QE.
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