“The Fed is going to hold 20 to 25% of the Treasury market, staying the largest holder of Treasuries, until about 2025,” –Paul Ebeling
Treasury investors fretting about when the Fed will pare its bond purchases may be missing the big picture. Its more than $5-T stockpile will make it a major market force for yrs to come.
The prospect of a taper in buying seemed a little nearer Wednesday when mins of the FOMC’s April meeting showed that a number of officials were willing to discuss it if the economy keeps improving. And yields rose on the news.
But bond Bulls say the Fed’s inextricable presence in the world’s largest bond market means it will provide Key support long after any price blips come and go when it brings its buying to a close.
The Fed’s Treasury holdings have 2X’d since March 2020, accounting for about 25% of the total outstanding, a bigger share than it held even after the Y 2008 credit crisis. This is a result of aggressive moves to keep the market functioning and hold down rates on everything from mortgages and car loans to corporate and municipal bonds.
The Fed will have a big hand in fixed-income markets for as far out as the eye can see.
The stake is so large that even once the Fed’s purchases wind down, it is expected to keep its holdings steady by buying new Treasuries whenever old ones mature, reducing the amount that would need to be sold to the public.
That gives savvy investors confidence that rates will not rise quickly on fear the economy is at risk of overheating.
“The Fed is definitely not going anywhere anytime soon with regard to the Treasury market,” said Mike Pugliese, an economist at Wells Fargo Securities, he predicts the Fed will begin tapering its purchases in January 2022 and end them around November. And he expects the central bank to keep its stake steady through the next 4 yrs.
Have a healthy day, Keep the Faith!