Monetary Seesaw – The Treasury and Fed at Opposite Ends
By Eric Leininger
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Exhibit 1. Domestic Security Holding of SOMA
Exhibit 1. Domestic Security Holding of SOMA, Source: Federal Reserve Bank of New York

Based on available information today, and assuming the FOMC continues to direct reduced purchases on this pace of $15 billion per month, by June of 2022 (8 months) the Fed will no longer purchase assets into the SOMA. 

The Potential to Move Markets

Putting it together, and assuming the trends continue, the Treasury is likely to reduce coupon issuance by $8 billion per month and the Fed will reduce tapering by $15 billion per month, leading to a net increase in coupons in the market of $7 billion per month.

The increases and decreases in fixed income supply have the potential to move interest rate markets and part of the curve in interesting ways.  It will be important to watch these trends and manage the risk accordingly.

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About the author

Eric Leininger
Eric Leininger

Eric Leininger is Executive Director of Financial Research and Product Development at CME Group. He is based in New York.

 

 

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