Central banks
Runoff ends with a bills only reinvestment plan, and the long end pays for it
Policymakers stopped shrinking the portfolio on Wednesday and will direct maturing proceeds to Treasury bills. The signal reads as neutral on the policy rate and distinctly negative for duration.
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Balance sheet decisions are supposed to be the boring half of a policy meeting. They arrive in a technical annex, they are pre-signalled for months, and the market reaction is usually a shrug. Wednesday broke that pattern. The policy rate was left alone, as everyone expected, at 3.50 to 3.75 per cent. The portfolio decision was the news, and the ten-year Treasury yield rose 13 basis points in the ninety minutes after it landed.
$2.9tn
Projected steady state reserve balances
Against $3.42tn in January and a $2.91tn August reading
- Quantitative tightening ends with immediate effect, so the portfolio stops shrinking after thirty-one months and roughly $2.3tn of runoff.
- All proceeds from maturing securities will be reinvested in Treasury bills rather than being spread across the coupon curve in proportion to issuance.
- Agency mortgage principal payments will also be redirected into bills, continuing the gradual move toward a Treasury only portfolio.
- The policy rate target range is unchanged at 3.50 to 3.75 per cent, with the statement language on labour conditions carried over unmodified from July.
- A technical review of the standing repo facility was announced for the December meeting, with no change to its terms in the interim.
The first four of those were broadly anticipated. The composition choice was not. Market expectations, as measured by the Harrow Lane dealer survey published three days before the meeting, had two thirds of respondents expecting reinvestment spread proportionally across the curve. Bills only is a more aggressive shortening of the portfolio's duration than the consensus allowed for, and its effect is to hand a meaningful amount of duration back to private investors at a moment when they have made clear they want more compensation to hold it.
The duration arithmetic
Work through the monthly flows. Coupon securities maturing from the portfolio average about $46bn a month over the next year. Under proportional reinvestment, roughly $38bn of that would have been reinvested in notes and bonds, with the remainder in bills. Under the announced policy, the coupon share is zero. That is $38bn a month of demand withdrawn from the part of the curve that is already absorbing elevated net issuance, or about $456bn over a year against annual net coupon supply that Bellweather Macro estimates at $1.6tn.
System portfolio by maturity bucket, estimated
| Bucket | Holdings | Share | Change since peak |
|---|---|---|---|
| Treasury bills | $298bn | 4.6% | +$41bn |
| Coupons under 5 years | $2,140bn | 33.2% | -$611bn |
| Coupons 5 to 10 years | $1,486bn | 23.0% | -$402bn |
| Coupons over 10 years | $1,012bn | 15.7% | -$88bn |
| Agency mortgage securities | $1,514bn | 23.5% | -$1,206bn |
Estimates compiled from published weekly statements. Totals may not sum exactly because of rounding.
Notice the last column. Mortgage holdings have fallen by $1.2tn from the peak while holdings of coupons over ten years are down only $88bn, because long bonds simply do not mature quickly and the portfolio has never sold them outright. The practical result is that the portfolio's remaining duration is concentrated exactly where the market is currently least willing to take risk, and the bills only decision guarantees that concentration persists rather than being topped up.
They have optimised for money market stability and accepted a steeper curve as the price. That is a coherent choice. It is not the choice the long end was positioned for.
Ines Marchetti, head of rates strategy at Harrow Lane Capital
The funding problem this solves
The case for acting now was built in the repo market rather than the bond market. Secured overnight funding traded 14 basis points above the floor rate on August 28 and stayed elevated for four sessions, the widest and most persistent dislocation since 2019. Reserve balances had fallen to $2.91tn, which several dealers had been arguing sits close to the level below which the system becomes reflexively short of liquidity.
Bank reserve balances
Month end, billions of dollars, 2026.
14 bp
Peak spread of secured funding over the floor rate
August 28, the widest since 2019
What to watch next
Three markers. Whether secured funding settles back within five basis points of the floor by the end of September, which would confirm the plan is working on its stated objective. Whether the December standing repo facility review widens eligible collateral, which would matter more for funding stability than the reinvestment mix. And the thirty-year auction on Thursday, which is the first real test of whether private demand can replace what the portfolio has stopped buying at the long end.
The broader point is that the two halves of policy are now pulling in different directions, and deliberately so. The rate path is being held steady with an easing bias that the front end has already priced. The portfolio decision tightens financial conditions at the long end of the curve, where mortgage rates and corporate refinancing costs are set. Whether that combination is a considered stance or an accident of sequencing is the question every rates desk spent Thursday arguing about.