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Investors Brace for QT’s ‘Profound Effect’ on Cost of Liquidity

  • Fed has signaled that balance-sheet runoff could begin in May
  • Treasury-market liquidity condition has already been worsening
Updated on

Some of the world’s biggest investors are bracing for a ramp-up in the cost they pay for liquidity in debt markets when the Federal Reserve soon starts allowing securities to roll off its mammoth balance-sheet.

A surge in interest-rate volatility has come amid an array of signs that liquidity in the Treasury market is faltering as multi-decade high inflation triggered the Fed to begin hoisting rates this month. The U.S. central bank ending its massive bond-buying that began in March 2020 has been a key catalyst for more difficult trading conditions that investors see only getting worse when quantitative tightening -- dubbed QT --- begins.