After 2 weeks of virtually no runoff in the Fed balance sheet their assets took a pretty big plunge last week with a drop of $39 billion. The Fed remains on track to meet their reduction of $45-50 billion of balance sheet reduction each month.
It is our belief that this runoff should have been started around 2 years prior to when it actually started–and at a more modest pace. While the 10 year treasury remains somewhat under control at 3.05% this morning it remains to be seen whether this will continue. Logically speaking there is less demand for government debt by a substantial amount with the Fed out of the market and at some point the Fed will be forced to reduce the ‘pace’ of the runoff as federal government debt continues higher and foreign buyers step back on purchases.
Below is the chart from the last 3 months showing the plunge in the balance sheet assets