The Fed is going to shrink its holdings of Treasuries by $60bn a month and using the estimates in this Fed working paper, quantifying the stock effect shows that this decline in the Fed’s balance sheet is expected to increase the level of 10-year rates by 50bps by the end of this year. The rule of thumb from the Fed’s work is that for every $100bn in QT 10-year rates will rise by 10bps. The bottom line is that QE pushed rates down and markets should expect QT to push rates higher.
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