This Month’s Chart Deck

The Fed continues to work down its System Open Market Account (SOMA) holdings of U.S. Treasurys through its tapered Quantitative Tightening (QT) at around $25 billion per month. Since QT began in July 2022, it shrank its Treasury portfolio by $1.5 trillion, which brought its balance of Treasurys down to $4.3 trillion, or 12% of total Treasury debt outstanding. In 2022, before it began QT, it owned $5.7 trillion Treasurys, which equaled 19% of the total outstanding (Slide 1). Treasuries outstanding equaled $28 trillion when QT began, which now equals $36 trillion. Japan and China remain the most significant foreign Treasury holders, and together with other countries, they own $8.7 trillion of outstanding debt (Slide 2). Foreign investors are the largest holders of Treasurys, owning more than mutual funds and the Fed (Slide 3)..

Banks continue to scale out of consumer mortgage debt, both in securities and loan form (Slide 4), as non-bank competitors squeeze their profit margins. The trend is especially pronounced for large banks based on H.8 data when comparing residential mortgage loans and Agency MBS to total bank credit.

Capital markets remain vulnerable to stress scenarios. One potential sign of stress is the growth in daylight overdrafts, which reached the highest level since the onset of Covid (Slide 5). Traffic on FedWire is also growing, with nearly $2.5 trillion average daily value of transactions (Slide 6) .

The 10-Year Treasury sold off by 100 basis points since the Fed’s first rate cut in September 2019, which sent its term premium up to the highest level it has been at in more than five years (Slide 7).

According to a survey the New York Fed conducted last fall, more than half of the participants thought that U.S. fiscal sustainability poses the most disruptive risk to the financial system, followed by tensions in the Middle East, policy uncertainty, and a U.S. recession (Slide 8). They considered commercial real estate risk last on their risk of worries. When the New York Fed polled market participants last December, it found that the median projection for the yield on the 10-year Treasury is that it would fall below 4.0% this year. When it ran the poll, the 10-year yield was 4.2%, and this month equals 4.6%-4.7%. Longer-term, participants expected that the yield would average around 3.5% (Slide 9). Bank treasurers discount any chance that the Fed would cut rates at its meeting of the FOMC this month and are growing more skeptical by the day it will cut rates at the following FOMC meeting in March 2025 (Slide 10).