Quantitative Operations by the FED in US
Assets & flows
QE/QT impact on bond supply
QE/QT influence on bonds
Insights
CONCEPT
We monitor here (1) the evolution of the FED balance sheet with its weekly QE | QT flows, (2) the impact on stock prices and bond yields, and also (3) on available bond supply (monthly). In fact, Quantitative operations are an additional policy lever in the FED's hands to regulate the financial system. The FED can buy or sell large amounts of financial assets - most commonly government bonds - in the open market to add liquidity to markets or remove it. Buying is nicknamed as QE (Quantitative Easing), selling as QT (Quantitative Tightening).
CURRENT READINGS
- The FED currently holds USD 6.4tn in financial assets on its balance sheet. It just removed 6.7bn USD liquidity from markets last week by selling/letting mature bonds it owned. In light of this, net bond supply available to investors remains positive but keeps trending down further - US bond yields are not currently supported by monetary policy.
MARKET IMPLICATIONS
The rising balance sheet of the FED shows a 1-year correlation of 0.69 with rising 10Y Treasury bond yields (no relationship) and of -0.30 with rising stocks in the S&P 500 index (no relationship). This means that ongoing quantitative operations did UNLIKELY influence stock prices and did VERY UNLIKELY influence bond yields.
In general, if the FED buys bonds on the open market (by running QE) it injects liquidity in the system while reducing bond supply, pushing bond prices up, yields down. Such force ultimately eases monetary policy, reducing the cost of issuing debt for companies while increasing returns bond investors. If the FED sells bonds on the open market - or let mature the ones it owns - (by running QT) it drains liquidity from the system while increasing bond supply, pushing bond prices down, yields up. Such force ultimately tightens monetary policy, increasing the cost of issuing debt for companies while reducing returns bond investors.