The Federal Reserve is trying to send a message to bond traders: prepare for a reduction in its $4.5 trillion balance sheet. But the traders aren’t buying it yet.
Such a move would most likely cause longer-term borrowing costs to rise because the Fed has been a large buyer of Treasuries and mortgage debt since the 2008 financial crisis. More than $400 billion of its holdings is set to mature next year, so a reduction in the Fed’s reinvestment could potentially depress market values.
…im Bianco, founder and head of Bianco Research in Chicago, said many traders think the Fed won’t make a move until 2020 or beyond.
“It is a mistake to conclude that the current talk means the market is fine with the balance sheet being reduced,” he said.