The Federal Reserve announced it will begin purchasing $40 billion in U.S. Treasury bills monthly starting this Friday, exceeding market expectations. The move aims to ease pressure on short-term rates by replenishing bank system reserves. This decision immediately triggered Wall Street banks to comprehensively revise their 2026 Treasury supply forecasts and drove down short-term borrowing costs across the board.
In addition to the new Reserve Management Program (RMP), the Fed will also reinvest about $14.4 billion in maturing agency debt into Treasury bills in December to further support funding markets. Following the announcement, Barclays significantly raised its 2026 Treasury bill purchase forecast, projecting cumulative purchases could reach $525 billion, up from an earlier estimate of $345 billion. Net supply available to private investors is expected to drop from $400 billion to just $220 billion.
JPMorgan similarly revised its forecast, expecting the Fed to maintain $40 billion monthly purchases until mid-April next year before reducing to $20 billion. Combined with MBS reinvestments, total 2026 purchases could approach $490 billion, nearly doubling previous estimates. TD Securities predicts $425 billion in Treasury bill purchases, absorbing almost all net supply, while Bank of America warns the Fed may need to "maintain high-intensity buying longer" to replenish required reserves. If Treasury bill investors face squeeze, the Fed might even extend purchases to notes maturing within three years.
Banks widely believe this action will effectively alleviate reserve scarcity caused by quantitative tightening, helping reduce short-term funding pressures while boosting front-end swap spreads - benefiting SOFR-fed funds basis trades. Wednesday saw surging volumes in short-term rate futures as 2-year swap spreads widened to April highs, signaling easing market tensions.
Strategists note the Fed is managing the return to "ample" reserves more cautiously than in 2019, demonstrating strong intent to avoid funding market disruptions. RBC views this as "more about absorbing Treasury issuance," suggesting the Fed and Treasury are jointly addressing funding market issues.
Despite improving liquidity, many warn year-end funding volatility remains likely. CIBC notes December purchases won't fully cover quarter-end overnight needs as banks typically shrink balance sheets year-end, tightening repo liquidity. Wells Fargo acknowledges the Fed's aggressive operations may make markets "less turbulent" but aren't a panacea, with near-term funding pressures persisting.
SMBC Nikko Securities analysis suggests that if bank reserves exceed $3 trillion by late January, SOFR could converge closer to IORB, potentially lowering federal funds rate by about 2bps. However, effectiveness depends on market participants' willingness to use the Standing Repo Facility (SRF).
As the Fed officially halts agency debt/MBS runoff in December while expanding Treasury holdings through reinvestment and RMP operations, funding markets enter a new phase transitioning from "quantitative tightening" to "reserve replenishment." With increased Treasury issuance and heightened short-rate sensitivity to funding conditions, Fed operations are becoming a critical variable for 2026 Treasury supply balance and short-term rate trajectories.
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