Goldman Sachs(US:GS) Hua Er Jie Jian Wen·2025-12-02 04:22Core Viewpoint - The end of the Federal Reserve's quantitative tightening (QT) marks a transition to a new phase, with ongoing liquidity pressures in the short-term funding markets despite the cessation of QT [1][3][5]. Group 1: Federal Reserve's Actions - The QT process officially ended on December 1, 2023, after significantly reducing the reserve levels in the banking system [1][3]. - The Federal Reserve plans to maintain its balance sheet at approximately $6.1 trillion, allowing agency debt and MBS to mature and using the proceeds to purchase Treasury securities [6]. - Goldman Sachs predicts that the Federal Reserve will initiate a "reserve management purchase" program in January 2026, involving monthly purchases of about $20 billion in Treasury securities and reinvesting $20 billion in MBS [9]. Group 2: Market Dynamics - The end of QT has shifted market focus to the Federal Reserve's future balance sheet management strategies, with expectations of potential asset purchases to stabilize the financial system [3][4]. - The Treasury is expected to net issue $870 billion in Treasury securities in 2026, with the Federal Reserve purchasing approximately $480 billion, leading to a reduced net supply for non-Federal Reserve buyers [12]. - The mortgage-backed securities (MBS) market is anticipated to face significant supply pressure as approximately $2.05 trillion in agency debt and MBS mature and enter the market [14]. Group 3: Funding Market Conditions - Despite the end of QT, liquidity tensions in the funding markets remain acute, with the usage of the Federal Reserve's Standing Repo Facility (SRF) reaching $26 billion, the second-highest level since 2020 [5][15]. - Recent data indicates that repo rates have been trading about 6 basis points above their fair value, reflecting structural shifts in reserve demand [15][18]. - The market is divided on the interpretation of these funding pressures, with some analysts suggesting that more aggressive measures may be needed from the Federal Reserve to stabilize short-term funding costs [18][19].