Investors say that there is a supply problem in the Federal Reserve’s plan to expand the balance sheet.
Fed Chairman Jerome Powell stated the U.S. central bank would look to restart the growth of the balance sheet by buying bills, or Treasury bonds with a year or less to maturity. But primary dealers don’t have enough bills in their inventories, making it a question of how the Federal Reserve will find the bonds it needs to purchase to increase its around $3.6 trillion portfolios. “Is that part of the market large enough to deliver the reserve growth wants?” asked the senior portfolio manager Steve Johnson, at SVB Asset Management. Since short term interest rates in the market jumped in September, traders and analysts have called for the central bank to restart the expansion of its balance sheet in order to increase the level of bank reserves to provide day-to-day fluidity in money markets. It’s not in the budget of the central bank to be able to increase the balance sheet at the pace it desires if they only rely on bills, and look past debt of longer tenors as said by the investors. “Where do they go besides banks for those bills? That’s a big question mark right now,” as said by Johnson. Preliminary dealers are banks and other financial institutions approved to trade with the Federal Reserve. In return for that privilege, they are bound to place bids at the U.S. Treasury Department’s debt auctions.
U.S. Treasury’s maintained by primary dealers stood at $206 billion in the week ending Sept. 25. This compared with their holdings of Treasury’s bills which averaged $22.9 billion over the last six months, according to Fed data. In conclusion, analysts say that the central bank will most likely have to open up the range of bonds for consideration, such as shorter-term bonds with maturities as much as three years.