Fed Debt Unwind End Is Set. So Treasury’s Looking at What’s Next

This all matters to the overseers of America’s debt because additional Treasury purchases by the Fed would reduce how much the government needs to tap from the the public to meet its funding needs. The Fed’s decision also factors into what maturities Treasury decides to issue. The central bank’s portfolio is about $4 trillion, including around $2.2 trillion of Treasuries and $1.6 trillion of agency mortgage debt. 

“It’s obviously a critical question for the Treasury,” said Lou Crandall, chief economist at Wrightson ICAP. “The Treasury should have a sense of what one of the biggest players in the market is going to do.”

Crandall expects the Fed will eventually tilt its Treasury purchases toward bills, as it seeks to align the maturity of its debt holdings with the average maturity of the public debt.  Currently, the weighted average maturity of the Fed’s Treasury investments is about 8 years. That compares with 5.8 years for the market.