🚨 The Federal Reserve is ending its quantitative easing program tomorrow - an event more significant than all discussions about interest rate cuts.
Since 2022, the Federal Reserve has been reducing its balance sheet: all treasury bonds or mortgage-backed assets that are due have disappeared from the system without reinvestment. Over three years, more than 3 trillion dollars in liquidity have been drained - one of the main reasons for the decline in high-risk assets.
And now, the mechanism is changing, and the shift is much deeper than it seems.
The Federal Reserve will stop allowing the full maturity of mortgage bonds. Funds received from maturities will now be redirected to purchase Treasury bonds. This is not quantitative easing, but a halt to liquidity contraction and a shift towards redistributing it.
This is critically important because the Treasury bond market is facing a massive wave of supply.
When the Federal Reserve becomes, even if indirectly, a regular buyer:
🔵 Demand is increasing
🔵 Yields tend to decrease
🔵 Financial conditions are improving
🔵 Institutions are no longer required to absorb the entire supply, freeing up liquidity that can be directed to other assets
This is the concept of "light quantitative easing": not a stimulus, but it is no longer a drain.
The recent maturities of asset-backed mortgage bonds show how the new structure works: billions that were previously drawn from the system are now returning to Treasury bonds monthly.
