US Policy Net Liquidity Challenges And Market Implications
(4 min read)
With the dust now settled post weeks of massive Fed liquidity injections, I explore the concepts of the Fed’s directive to maintain “market function” and what that means for policy and markets ahead. Clearly the rate vol in March was amplified by broader cross currents impacting all markets into the COVID-19 lockdowns. However, the issues that have been plaguing the bond market actually started in 2019.
Net, the Fed addressing repo demands and excess reserves in 2019 was largely about US finance needs. Similarly, what has happened post the COVID-19 supply ramp, the Fed has provided Treasury capacity to issue more to public markets, where the Fed can always buy more if private interest were to ever wane.
Let’s be clear, the Fed is not going to stop purchasing Treasuries any time soon. However, the peak benefit of the Fed’s liquidity is behind us in my view, especially as supply shifts towards the longer-end.
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