Fitch has issued a report stating that the Fed is now supplying, as of the end of the last quarter, $275 billion to this market. This is a jump from $45 billion at the end of the prior quarter which is a one quarter increase of 611%. This means less liquidity for the large American and European banks and more money for the Fed to invest as it leverages its balance sheet. J.P. Morgan estimates that money market funds may withdraw $100 billion in deposits in the second half of next year as they increase their investments with the Fed.
As I mentioned yesterday, the Fed, just as stated in the last FOMC minutes, has been buying longer dated Treasuries ($1 billion yesterday). They currently have just shy of $5 trillion dollars on their balance sheet. There is $1.2T of long-term (10+ years) US Treasury debt (face value). Currently, the Fed owns more than 50% of that long-term debt. Given that the production of new capital is about to end, they are using the interest income, anything that matures and anything that is called to make their purchases. Interest income alone could over $100 billion per year. I estimate that the $100 billion is just about enough to buy the entire 10+ year US Treasury annual issuance. Now they have an additional sources of funds and it should be noted. They can now use the money generated by their reverse repos for their buying program as well which is not an insignificant increase in their available capital. Here is one more force at work to hold interest rates down.