The Fed was to have achieved a $95 billion per month Balance Sheet reduction run rate by September ($60 billion of Treasury securities and $35 billion of mortgage-backed securities). The culling of $60 billion in Treasuries per month is going to be difficult to execute. The Treasury market lacks liquidity as evidenced by the sharp moves higher in Treasury yields. Thus, QT will likely be more muted than the Fed’s plan – at least insofar as Treasury holdings are concerned.
The sharp moves in Treasury yields speak to a lack of liquidity in the Treasury market. Look at the 2-Year Treasury yield as an example, it moved from 3.85% on September 16th to 4.20% on September 23rd, a 9% increase. The 2-Year Yield has increased 19.7% month-to-date. The Treasury market lacks buyers.
Month-to-date the Fed has only reduced its Treasury holdings by approximately $21 billion. If the Fed were to reduce its Treasury holdings by an additional $40 billion over the remainder of September to make target it would send Treasury yields skyrocketing higher. Thus, QT will be more muted than the Fed originally anticipated – at least as far as Treasuries are concerned.