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The QT Timebomb
An aggressive quantitative tightening (“QT”) pace would set the stage for another spike in rates, but this time further out the curve. During QT, the U.S. Treasury increases its borrowing from the private sector to repay Treasuries held by the Fed. While the Fed can be repaid with cash held in either the RRP or banks, the current issuance structure suggests repayment will largely come out of the banking system. The lesson of the prior QT was that reducing the cash balances of banks directly impacts markets that were recipients of that cash. In 2019, banks were pouring their extra cash into the repo market amidst ... (full story)
