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| US Bonds Review |
US Treasury bond’s overall trend, revealed by trends of price, leverage, and time, are defined in The Matrix for subscribers.
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Lots of Talk About Ending Quantitative Tightening
Quantitative tightening (QT) involves letting securities like Treasuries and mortgage-backed securities mature without reinvesting, draining liquidity from the banking system and lowering bank reserves. The article highlights that declining reserves strain short-term funding markets, including repo markets, SOFR, and other funding channels.
Multiple indicators suggest the Federal Reserve is approaching a point where bank reserves may shift from “abundant” to merely “ample,” increasing the risk of money-market disruptions. For instance, SOFR occasionally surpassing the interest rate on reserve balances (IORB) indicates emerging funding pressures.
Due to risks like potential funding, market squeezes or spikes in short-term borrowing costs, proposes that the Federal Reserve may soon announce a pause or halt to quantitative tightening (QT). This would involve stabilizing the balance sheet to ensure the financial system operates smoothly.
Although inflation, employment, and the broader economy are key to the Federal Reserve’s decisions, the article stresses that money market mechanics (“the plumbing”) are now a primary focus. The Fed aims to avoid liquidity or funding shocks that could impair its control over interest rates or destabilize markets.
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Financial conditions in the U.S. have quietly loosened even before the Federal Reserve has acted. Goldman Sachs’ Financial Conditions Index has dropped about 90 basis points since January, driven mainly by falling long-term yields, tighter credit spreads, and rising equity markets. Short-term rates and the dollar have barely moved, suggesting that Wall Street, not the Fed, has already started easing financial pressure.
This shift stems from three observations: (1) The cooling inflation and expectations of future Fed rate cuts have pushed long-term yields lower at least temporarily, reducing borrowing costs across mortgages and corporate debt. (2) Stocks have rallied on optimism about artificial intelligence and easier policy, lifting wealth and risk appetite. (3) Credit markets have strengthened. Tighter spreads reflect confidence and stable default risks. Steady reserves and Treasury bill issuance have kept liquidity abundant despite ongoing quantitative tightening (see Chart 1).
Chart 1: Quantitative Easing or Tightening
The invisible hand, however, moves ahead of the Fed. While short-term rates remain anchored, investors expect the central bank to end QT, and further rate cuts. The 2-Year Treasury, the invisible hand pushing the Fed, has falling out of a very large geometric coil (see Chart 2). We'll discuss this further in a future update to the US Bond Report. Falling yields can reflect either a healthy disinflationary soft landing, or an early warning of economic panic cycle. The Economic Activity Composite (EAC) and its cycle are typically the define the nature of the easing cycle. Soft landing, or panic cycle have and will be discussed in future Economic & Stock Report updates. Everyone following this report knows what the invisible hand is saying.
Chart 2: 2-Year Treasury
If the Fed halts Quantitative Tightening (QT), something that has yet to play out from the computer's perspective due to the government shutdown, and continues cutting rates, easing could accelerate. This would boost reserves, lowering borrowing costs, and signaling alignment between policy and the invisible hand. The 25-month yield curve inversion, and the well-defined Fed Panic Cycle predicts a vastly different outcome. This is cover for subscribers in numerous reviews, reports, and the Evolving Global Crisis in 2025 (soon to be 2026).
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