BofA Q&A on #QT:
1. What is QT?
The reverse of QE. In QT fed allows asset holdings to decline = lower reserve & o/n RRP levels. QT can occur by allowing bonds to mature w/o reinvestment, or more actively via bond sales.
1. What is QT?
The reverse of QE. In QT fed allows asset holdings to decline = lower reserve & o/n RRP levels. QT can occur by allowing bonds to mature w/o reinvestment, or more actively via bond sales.
2. How does QT work?
2 impacts: a) higher level of net UST issuance to the public, b) reduces liquidity
Every $1 of UST holdings that matures, Treasury needs to increase issuance to the public by similar amount. Treasury essentially borrows from the public to pay back the Fed
2 impacts: a) higher level of net UST issuance to the public, b) reduces liquidity
Every $1 of UST holdings that matures, Treasury needs to increase issuance to the public by similar amount. Treasury essentially borrows from the public to pay back the Fed
3 types investors:
a)bank buys new UST, cash reserves held at Fed decline & bond balance grows -> no net change in bank's BS.
b)MMF buy new UST, no impact on a bank but impacts Fed's ON RRP. MMF substitutes RRP & buy UST ->no impact on MMF total assets but does change composition
a)bank buys new UST, cash reserves held at Fed decline & bond balance grows -> no net change in bank's BS.
b)MMF buy new UST, no impact on a bank but impacts Fed's ON RRP. MMF substitutes RRP & buy UST ->no impact on MMF total assets but does change composition
c) the "public" consumes the new issue, it has a different impact on a bank. Non-bank financial institutions, corporations, or consumers buying new Treasuries would withdraw cash in deposit accounts at banks. This would reduce the size of a bank's balance sheet.
3. QT implementation
Fed will not sell assets, implements QT gradually, uses redemption caps (RC). RC limit amt of bonds that get paid down monthly, smooths amt of incremental new UST. RC work so that the maximum amt allowed to mature in any given month is = RC.
Fed will not sell assets, implements QT gradually, uses redemption caps (RC). RC limit amt of bonds that get paid down monthly, smooths amt of incremental new UST. RC work so that the maximum amt allowed to mature in any given month is = RC.
For example, if the redemption cap is $40bn and monthly maturities are $70bn, then the amount maturing will be $40bn and the rollover amount will be $30bn.
4. What is market impact of QT?
Every unadjusted 1% GDP and 10y equivalent 1% GDP of QE is equal to 7 and 10 bps, respectively on 10y yields. Applying this logic to estimate the impact of supply from QT, this implies about a 40bps impact from 2023-26.
Every unadjusted 1% GDP and 10y equivalent 1% GDP of QE is equal to 7 and 10 bps, respectively on 10y yields. Applying this logic to estimate the impact of supply from QT, this implies about a 40bps impact from 2023-26.
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