FED: Market Participants Eye Bill Buying, With MBS Running Off "Indefinitely"

The anecdotes of expectations for Fed balance sheet policy in the September Survey of Market Expectations suggest participants were slightly divided on the criteria that the Fed is likely to use to determine when to end balance sheet runoff.

• "Many respondents indicated they expected the end of balance sheet runoff to be determined by liability management considerations; some respondents cited the level of reserves as the primary factor influencing their estimate for the end of runoff, some respondents emphasized funding market indicators and several emphasized assessments of certain thresholds of reserves as a share of nominal GDP or bank assets."
• Additionally, there was uncertainty in both directions as to the timing of runoff ending, as well as to the ultimate size of SOMA holdings. It seems that the plurality of respondents saw risks of an earlier end to runoff ("several" vs "some"): "Some respondents viewed the distribution of outcomes as skewed toward a later end to runoff or a smaller SOMA portfolio versus their baseline expectations. In explaining these risks of a later end to runoff, several cited funding market or reserves dynamics while several cited the Standing Repo Facility as potentially enabling balance sheet runoff to continue longer. Several respondents viewed the distribution of outcomes for the end of runoff as skewed toward an earlier end of runoff or a larger SOMA portfolio versus their baseline expectations."
• The anecdotes also eyed potential post-QT balance sheet policy prospects - the key expectations were for reserve management purchases to involve primarily bills, with MBS running off "indefinitely": "Some respondents expected maturing MBS would be reinvested in Treasury securities once the reduction in the size of the balance sheet has been completed. Some respondents discussed expectations for reserve management purchases; several expected those purchases to be primarily composed of U.S. Treasury Bills. Several respondents expected the runoff of MBS holdings to continue indefinitely."
• Another question asked is "Please provide your expectation for each of the selected money market rate spreads* for the day after each of the FOMC meetings".
• There were no evident expectations for the moves in money markets we've seen in the last couple of weeks, for example Effective Fed Funds minus IORB was seen at a steady -7bp through January, however that's already moved to -5bp (EFFR 4.10% vs IORB 4.15%). That could potentially suggest that market dynamics are shifting more quickly than participants expected in a direction that would warrant Fed action.
• There were no expectations in the medians or the 25th/75th percentile respondents that there would be any shift in the Fed's administered rates through at least January, including ON RRP (seen = to the bottom of the Fed funds target range) and IORB (seen remaining 10bp below the top of the Fed funds target range).