On Monday, when discussing the two key, opposing forces facing stocks this week, we said that while on one hand stock buybacks will make a triumphant return, as companies with $50bn of quarterly buybacks exited their blackout periods, and the total number of permitted stock repurchases jumps to $110bn by the end of next week and to $145bn the following...
... the offset of the favorable flows from corporate buybacks would be the Fed itself, as the largest Fed balance-sheet reduction-to-date ($-33.3B) would take place on Halloween.
And sure enough, one month after the Fed quantitative tightening entered its peak monthly unwind phase, during which the Fed's balance sheet is scheduled to shrink by "up to" $30 billion in Treasuries and "up to" $20 billion in MBS a month, for a total of “up to” $50 billion a month, on October 31 the balance sheet declined by $33.8 billion - the biggest weekly total yet - consisting of $23.8 billion in Treasuries, $8 billion in Mortgage Backed Securities, and a modest decline in various other assets.
As a result of Wednesday's maturities, the Fed's balance sheet has now shrunk by $321 billion to $4.140 trillion, the lowest since February 12, 2014; since October 2017, when the Fed began its QE unwind, it has now shed $321 billion, or just over 7% from its all time highs.
While MBS totals shifted around over the month, the Treasury decline took place in one day as there were no Treasury securities maturing on Oct. 15, while three security issues matured all in one day on Oct. 31, totaling $23 billion. Those were allowed to “roll off” entirely without replacement. In other words, the Treasury Department paid the Fed $23 billion for them, money which the Fed will promptly "shred", digitally speaking.
Total October TSY maturities were $7BN below the $30BN cap, and while December sees $59N in Treasuries maturing, the Fed's maturity cap means that roughly half of this amount will be allowed to rollover, while $29 billion worth of new Treasuries will be repurchased. Then, one month later,
One month later, in December, another $18 billion in Treasuries are scheduled to mature, and so forth as determined by the maturity schedule of the Fed's current Treasury holdings (shown below) until such time as the Fed finally halts QT and/or launches even more QE.
Finally, for traders hoping to time the unwind of the balance sheet "to the day", this is problematic as there are discrete steps in the process of actual liquidity extraction: as WS notes, the drains runs from the bond market through Treasury auctions and then the Treasury Department’s cash account to the Fed. Throughout the process, the timing of the drainage gets disbursed – as does the impact on the markets.
This week is a case in point: in a time when the Fed just saw the largest shrinkage of its balance sheet since the start of QT, the market soared higher, which once again begs the question: are stock buybacks a more powerful "flow" factor for risk asset prices than the Fed's balance sheet unwind, and how much longer will this be the case.