QT to finish this December with hardly a whimper: Barclays By Investing.com

The Federal Reserve’s quantitative tightening (QT) program will conclude this December with out inflicting important market disruption, analysts at Barclays stated in a current notice.

As they highlighted, this stands in stark distinction to the abrupt finish of QT in 2019, which triggered a funding shock. The evaluation from Barclays highlights the measures the Fed has carried out to keep away from repeating previous errors and guarantee a easy transition.

“The Fed continued QT for too lengthy in 2019,” Barclays famous. “It didn’t have a great sense for banks’ most well-liked ranges of precautionary liquidity, and it centered too intently on developments within the fed funds market.”

This time, the Fed is taking a extra cautious method. The central financial institution has broadened its monitoring of funding situations and began tapering QT with reserves nonetheless above $3.4 trillion. Furthermore, central clearing and the Standing Repo Facility (SRF) present extra safeguards in opposition to a funding shock just like 2019.

A number of indicators that signaled market strains in 2018-19 at the moment are elevated. Hedge funds have related ranges of lengthy Treasury positions financed with secured borrowing, and vendor stability sheets are congested with record-high Treasury holdings.

Now, Barclays believes that the Fed’s preparedness and proactive measures will guarantee a easy finish to QT.

“We expect there are two components pointing to a cleaner finish to QT this yr,” analysts wrote.

“First, the Fed appears to be paying extra consideration to markets and situations outdoors the fed funds market,” the analysts state.

The second issue contributing to Barclays’ confidence is the growth of sponsored repo exercise and central clearing since 2020. These measures have considerably elevated sellers’ stability sheet capability by means of netting.

“Sponsored repo – and central clearing extra usually – expands sellers’ stability sheet capability by means of netting. Sponsored repo (longs and shorts) exceeds $1 trillion and has greater than doubled since 2019,” the report highlights.

In sum, Barclays expects the Fed to finish QT in December “with hardly a whimper” and “nicely earlier than indicators of stress emerge in both the fed funds or repo market.”