The Fed’s Long Unwinding Road

The Fed’s Long Unwinding Road

3. We assume that Fed holdings of USTs and MBS are proportionally reinvested in Treasury bonds. For USTs, we used disaggregated data to separate out the mid-month and end-month maturities, given the different issuance schedule at these auctions. For mid-month auctions, 38.6% of reinvested USTs werechanneled into three-year securities, while at the end-month auctions, 29.5% of reinvested USTs were channeled into two-year securities (as per the Treasury’s auction schedule over the past year). Since the remaining securities issued at both mid-and end-month auctions have tenors greater than three years, they do not affect the analysis (over the relevant horizon). Additional assumptions were made on the liability side of the balance sheet regarding the growth of currency, required reserves and the capital/other liabilities category to back out excess reserves.

4. From Janet Yellen’s June press conference: “My hope and expectation is that…this is something that will run quietly in the background over a number of years…as exciting as watching paint dry.”

5.The BIS has highlighted amplification mechanisms in financial markets that pushed yields lower during QE. Potentially, these dynamics can easily reverse. For an example of such a mechanism, see a case study on risk management in German insurance firms described in the BIS paper “How Much Should We Read into Shifts in Long-Dated Yields,” Hyun Song Shin, 3/3/17.

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