$19.5B reduction (selling) in SOMA Balance sheet and UST yields are dropping. How does that figure? UST yields have been distorted ever since QE started, now we have QT and the distortion continues in a way that seems to brings things back to normal. Is “flight to safety” back in vogue?
The very small reduction in the SOMA balance sheet is part of the Fed’s announced QT. At this rate, they will never return to normal.
I think the sudden drop in the Treasury yield curve may be due to Jerome Powell’s recent comment that he will tighten until inflation drops even if a recession results. It’s normal for interest rates to fall (bond prices to rise) during a recession. Notice that high-yield bond prices (which often act like stocks since they are so dependent on economic conditions) are falling, while Treasury prices are rising. (That’s the HYG:$UST panel.) Investors are taking Powell at his word and anticipating a recession.
Flight-to-safety buying could also be a factor. Basically, that’s just a shorthand way of saying that investors believe the stock and junk bond markets will continue to fall so they are shifting funds to safe Treasuries.