Signs Of Impaired Liquidity Probably Factored Into Deeper Fed QT Taper

Bloomberg’s U.S. Tsy liquidity index warrants attention.

• While operating off multi-year peaks, the index sits above levels seen around the time of the initial COVID outbreak in ’20, hardly a sign of a well-functioning market.
• Fallout from the sharper-than-expected QT tapering announcement at yesterday’s FOMC decision ($35bn reduction in the monthly cap for Tsy sales vs. $30bn that was widely expected) will be in focus during the coming months.
• What guided the Fed’s decision to provide a more aggressive QT taper than almost everyone expected? We don’t know, the post-meeting line of questioning on the topic was weak to non-existent.
• Meanwhile, there was a lack of detail/further explanation surrounding Fed deliberations and any guidance from the SOMA desk.
• We would point to the liquidity measure flagged above as a potential ‘tell’ for at least some of the Fed's thinking.
• This also comes after the Treasury recently formalised its buyback schedule with a focus on liquidity management.
• Note that some sell-side names have tweaked their calls re: the length of the QT scheme, seeing yesterday’s move as a step towards prolonging the Fed’s balance sheet rundown.

Fig .1: Bloomberg U.S. Tsy Liquidity Index