The Fed's Balance Sheet Plans Are Kryptonite For Risk Assets | Andy Constan
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Scale is the blockchain that's truly built different. Explore more at scale.space/ecosystem and follow them on x at scale network. Crypto's premier institutional conference is returning to New York on March. We're hosting one of the world's best crypto conferences for institutional and professionals alike. It's gonna be a ton of fun. I'm gonna be there hosting a variety of different panels. I'll be doing a fireside chat with Mohammed El Erian, a different macro panel with Jim Bianco and Joseph Wang, And we're also gonna be doing a live Ford guidance round up there where myself, Tyler, and Quin
So I I mean, I guess the idea is first we have to go back to what QE was where the Fed bought, $3,000,000,000,000 of, securities and offset the fiscal spend, treasury securities. They also bought MBS, and that created a an easing in financial conditions because it required the, it removed risk from the market so that private sector participants could recycle that money into more risky assets. And so, you know, that's how QE generally works. It doesn't attempt to set an interest rate. The economy and its outcomes set the interest rate, but it wants to, when they're doing QE, they're attempting
Scale is the blockchain that's truly built different. Forget gas fees and waiting. Scale offers a seamless web three experience with fast, fee free transactions. Whether it's gaming, AI, or next gen dApps, Scale is here to power your future. Explore more at scale.space/ecosystem and follow them on x at scale network. Okay. So before we go in a little bit deeper on the how and the mechanics of that and also what are the potential market impacts, I do wanna just clarify a little bit of of the why that they're trying to do this. So it seems to me like they're basically trying to get their Soma po
Well, I think of it more as a, asset liability matching. The liabilities of the Fed are the bank reserves, the currency. There used to be the RRP, but that's almost zero now. And those are the reserves, for instance, pay overnight repo. Well, pay pay IORB, which is basically about the same as Fed funds. And so that floats with fed funds. Their assets are mortgages and thirty year bonds that that, as we've seen, creates tremendous p and l volatility. Not that the p and l of the of the Federal Reserve is particularly important. But if you own a three percent thirty year bond and you're financing
it. Okay. And just to be super clear, that that reinvestment mechanic, that's why you see them show up at treasury auctions because they're reinvesting into the long duration. Is that where it occurs?
Yes. Every auction, you'll see that the the Fed is, has maturities ex in excess of their $25,000,000,000 cap, which is most nowadays. When the cap was higher, sometimes they wouldn't. But pretty much now, every month, you have maturities that are greater than that. The reinvestment is across all treasuries issued in that month proportional to the treasury amount. So if they issue 25,000,000,000, thirties and 50,000,000,000 tens. They buy twice as many tens as they buy thirties. And there's great confusion on this topic, so I'll hit on it. The way it happens is if the auction is for 25,000,000,
Got it. Okay. That's super helpful. So, basically, because the Fed's Soma portfolio is quite duration duration risky right now, there's this asset liability mismatch. If we were to go into crisis right now and they had to step in, that would be a bit of a nightmare. But if we can get to a point where their their duration is lower and then we were to see a crisis in the future, that would set them
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