To QE or Not to QE Does The Bond Market Already Know the Answer?
If the Fed is about to restart QE — as I’ve been reading non-stop on social media over the past week — the three-month Treasury has a strange way of showing any nervousness or excitement about it. In fact, the three-month Treasury rate rose by two basis points today to 3.73%. That’s not exactly what you would expect ahead, an asset-purchase program designed to expand the Fed’s balance sheet. I would expect rates to be moving lower in anticipation of such a program, but we’re seeing the opposite. That tells us the market is not pricing in an expansion of the Fed’s balance sheet at the December meeting.
What’s far more likely is that the Fed will continue to reinvest maturing securities into Treasury bills, which means the balance sheet won’t be growing — just shifting in composition and duration, and the asset side freezing.
Also, when we look at the SOFR—specifically the March 1-month SOFR futures spread against Fed Funds—we see the spread widening to roughly +8 basis points. This implies the market expects SOFR to trade above the policy rate, reflecting tight conditions to persist; this is the opposite of a QE signal, suggesting overnight funding conditions will remain tight for some time longer.
So if the Fed is about to expand the balance sheet, it seems to me it might come as a surprise to the bond market. But I’m tired, and my eyes hurt at this point of the night.
mike
Glossary by ChatGPT
Basis Point – A unit equal to 1/100th of a percentage point, used to measure changes in interest rates or yields.
Fed Funds – The interest rate at which depository institutions lend balances to one another overnight, serving as the Federal Reserve’s key policy rate.
QE (Quantitative Easing) – A monetary policy tool in which a central bank purchases assets to inject liquidity and expand its balance sheet.
Repo (Repurchase Agreement) – A short-term secured loan in which one party sells a security and agrees to repurchase it later at a higher price.
SOFR (Secured Overnight Financing Rate) – A benchmark rate reflecting the cost of overnight borrowing collateralized by U.S. Treasury securities.
Treasury Bill (T-Bill) – A short-term U.S. government debt security that matures in one year or less and is sold at a discount.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.