Bond Market’s ‘Vicious Cycle’ Risk Puts Spotlight on Fed’s QT

The worst selloff of longer-term Treasuries in more than four decades is putting a spotlight on the market’s biggest missing buyer: the Federal Reserve.

The Fed is shrinking its portfolio of government securities at a $720 billion annual pace, making the Treasury Department’s job of funding a near-$2 trillion federal deficit all the harder. Quantitative tightening, as the Fed’s program is known, ended earlier than officials expected the last time it was executed, and some market participants predict the same this time.

While Fed Chair Jerome Powell and fellow policymakers have indicated the surge in longer-term Treasury yields may reduce the case for continuing to hike the central bank’s benchmark interest rate, they’ve made no such suggestion for QT. Instead, they’ve said the process could keep going even after rate cuts have begun.

Fed Shrinks Its Treasuries Portfolio

With 10-year yields surging past 5% for the first time since 2007 this week — and having climbed at the fastest pace since 1982 — the Fed may come under pressure to reconsider. At stake is the threat of surging borrowing costs ushering a harder landing for the economy, an outcome that would imperil riskier assets such as equities and corporate credit.

“They can change that very quickly if they need to — if the bond vigilantes continue to send a message,” Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said of the Fed and QT. “Supply is important right now, and it’s supply during QT and that’s the interesting thing.”