To QE Or Not To QE Does The Bond Market Already Know The Answer?
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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.
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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. ...
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