Q and A
The reinvestment shift in numbers, from monthly coupon flows to the 2027 absorption gap
Six questions about the September 10 decision, answered with the arithmetic rather than the adjectives. The whole argument turns on $38bn a month and who has to buy it instead.
In this story
Illustrative. Bank Season is an editorial prototype. This story, its sources, the issuers named in it and every figure it quotes are invented to demonstrate the publication. Nothing here is reported fact or investment advice. Read the disclosure.
Three days of commentary have produced a great many adjectives about Wednesday's decision and not much arithmetic. The arithmetic is not complicated and it settles most of the disagreements. What follows is the decision, the flows it changes, and what each market had priced by Friday's close, in the order a reader is likely to want them.
What exactly changed
The September 10 decision, before and after
| Item | Before September 10 | After September 10 | Effect |
|---|---|---|---|
| Portfolio direction | Shrinking by runoff | Stable, fully reinvested | Ends thirty-one months of contraction |
| Coupon reinvestment | None, securities ran off | None, proceeds go to bills | No change to coupon demand |
| Bill reinvestment | None | All maturing proceeds | Adds reserves, shortens portfolio |
| Agency mortgage principal | Ran off | Redirected into bills | Continues the move to a Treasury only portfolio |
| Policy rate | 3.50% to 3.75% | 3.50% to 3.75% | Unchanged for a third meeting |
| Standing repo facility | Unchanged terms | Technical review set for December | No relief before the year end turn |
Runoff totalled roughly $2.3tn over thirty-one months before the decision.
The second row is where most of the confusion sits. Coupon demand from the portfolio was already zero under runoff, so the decision does not withdraw anything that was being supplied on Tuesday. What it withdraws is the demand that would have resumed had reinvestment been spread proportionally across the curve, which is what two thirds of the dealer survey expected.
How much coupon demand is at stake
Monthly maturing proceeds and where they go
| Destination | Under proportional reinvestment | Under bills only | Difference |
|---|---|---|---|
| Treasury bills | $8bn | $46bn | +$38bn |
| Coupons under 5 years | $19bn | $0bn | -$19bn |
| Coupons 5 to 10 years | $13bn | $0bn | -$13bn |
| Coupons over 10 years | $6bn | $0bn | -$6bn |
| Total | $46bn | $46bn | 0 |
Average monthly maturing proceeds over the next twelve months. Proportional allocation approximates the issuance mix.
$38bn
Monthly coupon demand withheld under the bills only plan
Against proportional reinvestment across the curve
What that does to the supply the market has to absorb
Net coupon supply and private absorption
| Period | Net coupon issuance | Portfolio coupon demand | Private absorption required | Change on prior year |
|---|---|---|---|---|
| 2024 | $1.21tn | -$420bn | $1.63tn | +18% |
| 2025 | $1.44tn | -$310bn | $1.75tn | +7% |
| 2026 estimate | $1.60tn | $0bn | $1.60tn | −9% |
| 2027 under proportional | $1.68tn | +$456bn | $1.22tn | −24% |
| 2027 under bills only | $1.68tn | $0bn | $1.68tn | +5% |
Bellweather Macro estimates. Negative portfolio demand denotes runoff adding to the supply the private market absorbs.
The last two rows are the entire argument. Both assume the same issuance. Under proportional reinvestment, private investors would have absorbed $1.22tn of coupons next year, a 24 per cent reduction on this year and the first meaningful relief since 2023. Under the announced plan they absorb $1.68tn, which is 29 per cent more than the alternative and slightly more than they are absorbing now.
$456bn
Coupon demand withheld over a year
Against annual net coupon supply estimated at $1.6tn
What the market did about it
Four sessions after the decision
| Instrument | September 9 close | September 11 close | Change |
|---|---|---|---|
| 10-year Treasury yield | 4.31% | 4.53% | +22 bp |
| 2-year Treasury yield | 3.40% | 3.35% | −5 bp |
| 30-year Treasury yield | 4.96% | 5.21% | +25 bp |
| 2s10s spread | 91 bp | 118 bp | +27 bp |
| S&P 500 | 6,482 | 6,396 | −1.3% |
| Gold | 4,108 | 4,183 | +1.8% |
| Dollar index | 97.4 | 96.1 | −1.3% |
Closing levels. The full four session move in the ten-year, measured from the September 8 close, was 34 basis points.
Equities fell 1.3 per cent, which is a modest response to a 22 basis point move in the discount rate, and the aggregate conceals the split underneath it. The eleven largest index members fell 0.4 per cent. The equal weighted index fell 2.7 per cent. A term premium shock lands on companies that have to refinance, and the index level understates it because the index is dominated by companies that do not.
What each market is now pricing
Market measures on September 11 against a month earlier
| Question | Measure | September 11 | One month earlier |
|---|---|---|---|
| How much easing by end 2027 | Futures strip | 61 bp | 112 bp |
| Compensation for holding duration | Ten-year term premium estimate | +61 bp | +28 bp |
| Long run inflation expectation | 5y5y forward breakeven | 2.44% | 2.31% |
| Stress in secured funding | Spread to the floor rate | 3 bp | 5 bp |
| Credit risk appetite | High yield index spread | 396 bp | 331 bp |
| Equity risk appetite | Three month implied volatility | 14.8 | 14.2 |
Term premium from the Bellweather Macro model. High yield spread from the Ledgerbrook US index.
The final row is the outlier and the most instructive line in the table. Every other measure has moved to price more compensation for risk, and equity implied volatility has barely moved at all. Either the equity market is right that a repricing of duration does not threaten index level earnings, which is defensible, or it is measuring the wrong index. Both readings have the same practical consequence for anyone whose portfolio sits below the top of the market capitalisation table.
What settles the question
Two dates. The Marlowe services nowcast on Wednesday tells the front end whether the easing it has priced has any inflation cover, and a reading below 3.2 per cent annualised validates the rally in the two-year. The thirty-year auction on Thursday tells the long end whether real money will take the paper at 5.2 per cent without the obliged bidders absorbing a quarter of it. A soft nowcast and a strong auction would flatten the curve from both ends, which is the single combination almost nobody is positioned for.
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