Federal Reserve Balance Sheet Run Off Begins Tomorrow

Good morning lads!

Futures are soft and commodities strong. We are coming off from a very strong week whereby the NASDAQ leapt higher by 7%, featuring all sorts of wonderful wonders take place. The backdrop of the rally of course was grim, as the Dow had previously plunged 8 weeks in a row — the longest losing streak in the Dow since 1923. But don’t let that get you down lads; China is reopening and Italy just removed their COVID restrictions.

In other others, the Fed begins to sell down their balance sheet tomorrow.

How big is said sheet? About $9 trillion, all monopoly money.

For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.
For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.

Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.

To ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves.
Once balance sheet runoff has ceased, reserve balances will likely continue to decline for a time, reflecting growth in other Federal Reserve liabilities, until the Committee judges that reserve balances are at an ample level.
Thereafter, the Committee will manage securities holdings as needed to maintain ample reserves over time.

Based upon the Fed’s plans, the balance sheet will take a lifetime to drawdown, aka never going to happen.

US 10yr is +10bps, which is probably some front running ahead of tomorrow’s excursion into the unknown. How long can the Fed run down it’s balance sheet without the market bitching about it? We’re about to find out.