📝 Liquidity And Market Functioning May Push Fed to End QT Before Reaching Target: BofA

Estimate the Fed to reduce its balance sheet by $2.6 trillion in assets through 2024: $1.75 trillion in Treasuries and $850 billion in MBS. Liquidity and market functioning issues may push the Fed to end QT before it reduces its balance sheet to the expected level of around $6.4tln. While at times higher Fed purchases enhance liquidity conditions, this is not always the case, and fewer Fed purchases don’t always mean worse liquidity conditions. However, with no regulatory improvements to aid dealers‘ ability to intermediate, increased supply that needs to get funded without any support from the Fed will likely create continued bouts of illiquidity. Estimate the impact of quantitative tightening on the 10-year yeild to be around 40 to 50bps, this has been priced in. - BofA Rates Strategy