The Federal Reserve's newly introduced Reserve Management Purchases (RMPs) program, combined with the U.S. Treasury's adjustments to bond issuance strategies, is generating market effects akin to quantitative easing (QE).
According to market sources on December 15, Bank of America noted in a recent report that while RMPs alone do not equate to QE, the coordinated actions of the Fed's purchases and the Treasury's issuance strategy effectively constitute a "QE-like policy mix."
The report highlights that the Fed's RMPs, launched this month, are not traditional QE but indirectly enable the Treasury to increase short-term bill issuance while reducing medium- and long-term bond supply. Bank of America estimates that in 2026, the Fed will purchase $560 billion in Treasury bills through RMPs and MBS reinvestments, while the Treasury plans to issue an additional $500 billion in short-term bills and cut $600 billion in longer-term bond issuance.
This parallel adjustment between the Fed's balance sheet and Treasury issuance strategies exhibits financial repression characteristics. Analysts argue that a higher proportion of short-term debt issuance will mitigate duration risk, exerting downward pressure on long-term rates. The combined effect is projected to lower 10-year Treasury yields by 20–30 basis points in 2026.
**How RMPs Morph into "Stealth QE"** Technically, the Fed's RMPs are not direct QE, as the central bank does not remove duration supply from the market outright. However, by absorbing short-term bills, the program allows the Treasury to rebalance issuance structures.
Bank of America emphasizes that the Treasury is the critical variable. The Fed's short-term bond purchases enable the Treasury to increase bill issuance while reducing net medium- and long-term supply. Since the Fed effectively absorbs the additional short-term supply, the private sector's share of Treasury holdings remains stable or even declines slightly.
The bank notes that RMPs provide the Treasury with ammunition to engineer "QE-like effects" through issuance management. Detailed projections for 2026 reveal staggering figures: - **Fed purchases**: $560 billion in total short-term bill purchases ($380 billion via RMPs, $180 billion via MBS reinvestments). - **Treasury adjustments**: $500 billion more in short-term issuance and $600 billion less in longer-term bonds versus 2025.
This supply shift—fewer long-term bonds and more bills—responds to a wave of medium- and long-term maturities and expanded buyback operations in 2026. The "perfect alignment" between Fed and Treasury policies effectively removes duration supply from the market.
**Impact on Treasury Yields** The Treasury has signaled its intent to stabilize long-term bond auction sizes in "coming quarters," meeting incremental funding needs with increased bill issuance. At its November refunding meeting, it hinted that medium- and long-term issuance growth may not begin until FY2027, supported by advisory committee recommendations to focus on the mid-curve.
Bank of America's scenario analysis shows: - Under baseline assumptions, the Treasury would start increasing 2- to 7-year auction sizes in February 2027. - In alternative scenarios, maintaining current long-term issuance or cutting bill supply to 20% of historical averages would yield markedly different market impacts.
Higher bill issuance in FY2026–27 could reduce 10-year equivalent supply by $700 billion to $1 trillion versus the 20% bill scenario, translating to a net easing effect of 20–30 bps on 10-year yields.
Using historical QE models, Bank of America quantifies the policy mix's impact: every 1% of GDP in 10-year equivalent QE corresponds to a 10 bps yield decline. In baseline vs. 20% bill scenarios, duration adjustments would lower yields by 16 bps in 2026 and 5 bps in 2027 (21 bps total). If the Treasury halts long-term issuance growth entirely, the total impact could reach 31 bps.
**Trading Opportunities Amid Easing** Bank of America recommends three trades to capitalize on the expected easing environment: 1. **Long front-end swap spreads**: Current 2-year spreads at -18 bps face risks from unexpected deficit deterioration. 2. **Long 5-year real yields**: At 103 bps, looser financial conditions historically support inflation compensation, bolstered by the Fed's dovish tilt. 3. **Sell 1y1y vs. 1y10y volatility spreads**: Currently at 2 bps, with risks tied to Fed policy uncertainty. Analysts believe the policy mix should dampen near-term rate volatility.
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