The Fed ended its bond-buying stimulus, popularly known as quantitative easing, or QE, in October 2014, but it’s been maintaining the size of its holdings by reinvesting money from maturing debt into more securities.
In the past five years, the central bank spent almost $200 billion on reinvestments in Treasuries alone.
With the U.S. economy on the upswing, the worry is that the Fed will upend the bond market as it starts unwinding the most aggressive stimulus measures in its history.
In addition to raising rates by year-end, a majority of forecasters expect the Fed will let some debt securities mature in the first half of 2016 without plowing the money back into the bond market. Apart from Treasuries, the central bank has also amassed $1.73 trillion of mortgage-backed securities and now holds a total of $4.2 trillion of bonds.
By pulling back, the Fed will start removing one of the biggest sources of Treasuries demand, which has suppressed borrowing costs and helped the U.S. recover from its worst recession in decades.