The Fed has been acting as a buyer of last resort for almost 15 years when it comes to US Treasury bonds. Quantitative easing brought balance sheet expansion, and particularly through SOMA (System Open Markrt Account) the Fed has been acquiring a very important percentage of all treasury issued for years. That was key during the pandemic when the Fed expanded its balance sheet almost as much as it was issued. In June 2022, however, the Fed announced quantitative tightening, and it’s no longer the buyer of last resort and it’s letting its SOMA portfolio run off, while the treasury needs to issue more debt to cover the fiscal deficit. The result is the alligator chart you see below. As a consequence, the whole treasury yield curve, with the exception of the Overnight bucket that is controlled by the FOMC, is moving up, to adjust to the new reality, where the supply is far bigger than demand.
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