Core Viewpoint - The Federal Reserve may adjust its asset portfolio to better align its assets and liabilities, mitigating interest rate risks and improving its negative asset situation, which could provide crucial support to the U.S. Treasury and reshape the supply-demand dynamics in the short-term bond market [1]. Group 1: Federal Reserve's Strategy - The Federal Reserve is likely to gradually reinvest the proceeds from maturing mortgage-backed securities (MBS) into short-term Treasury bills (T-bills) and convert maturing Treasury bonds into shorter-term notes, aiming to shorten liability durations and reduce the impact of long-term interest rate fluctuations on its balance sheet [3]. - The potential scale of this operation could approach $1 trillion, as the Treasury has recently issued about $1 trillion in short-term notes, with the Federal Reserve possibly becoming a major buyer, creating new demand in the front end of the market [3]. Group 2: Impact on Treasury and Bond Market - The U.S. Treasury has been increasing short-term bond issuance to address the expanding fiscal deficit and accelerate cash reserves replenishment after the debt ceiling was raised in June. The Federal Reserve's shift towards short-term Treasury investments could absorb some of the new supply, alleviating concerns about supply-demand imbalances in the short-term bond market [3]. - This adjustment may enhance liquidity in the short-term bond market but could also increase volatility in long-term bonds. Additionally, a large-scale shift to short-term Treasury securities may indirectly affect the stability of the overnight funding market [4].