The Federal Reserve is back in the short-term debt market, and Wall Street urgently raises expectations for bond purchases.

The Federal Reserve announced that starting this Friday, it will purchase $400 billion worth of US Treasury securities each month, which is higher than market expectations. This move aims to alleviate short-term interest rate pressures by supplementing bank reserves. The announcement immediately triggered a comprehensive revision of Wall Street's forecasts for 2026 US Treasury supply and led to a general decrease in short-term borrowing costs. In addition to the new Reserve Management Purchases (RMP), the Fed will also reinvest approximately $14.4 billion of Treasury securities that will mature in December to further support the funding markets. Following the announcement, Barclays significantly increased its forecast for the Fed's 2026 Treasury purchases, believing that the total debt purchases for the year could be close to $525 billion, higher than the previous estimate of $345 billion. The net supply available to private investors is also expected to decrease from an anticipated $400 billion to just $220 billion. JPMorgan also raised its forecast, expecting the Fed to maintain its $400 billion monthly purchase pace until mid-April of next year, and then decrease to $200 billion per month, along with reinvestments from MBS payments, the total purchases for 2026 will be close to $490 billion, almost doubling. J.P. Morgan Securities predicts that the Fed will buy $425 billion worth of Treasury securities, absorbing almost all net supply; while Bank of America believes that in order to replenish the required reserves in the market, the Fed may be forced to "maintain high-intensity debt purchases" for a longer period. If Treasury investors are squeezed, the Fed may even expand its purchases to include short-term securities maturing within three years. Investment banks generally believe that the Fed's move will effectively alleviate the reserve constraints caused by balance sheet shrinking, help lower short-term financing pressures, and increase the short-term swap spreads, benefiting SOFR-Fed Funds spread trading, and front-end basis trading. Trading volume in short-term interest rate futures surged on Wednesday, with the two-year swap spreads widening to a new high since April, indicating that market tension has eased somewhat. Strategists also point out that the Fed is managing the return of reserves to a "sufficient" level more cautiously than in 2019, reflecting a strong intention to avoid disorder in the funding markets. Some institutions, like RBC, believe that this move is "more like absorbing the issuance from the Treasury Department," indicating that the Fed and the Treasury Department are actually jointly addressing the same issue in the funding markets. Although the liquidity environment will improve, many institutions warn that year-end market volatility is still difficult to avoid. CIBC points out that the debt purchases in December are still not enough to cover the overnight funding needs at quarter-end, as banks typically shrink their balance sheets at the end of the year, leading to tightening liquidity in the repo market. Wells Fargo also stated that while the Fed's proactive operations can make the market "less turbulent," it is not a panacea, and short-term funding pressures still exist. According to an analysis by SMBC Nikko Securities, if bank reserves are increased to over $3 trillion by the end of January next year, the SOFR rate will be closer to the Interest on Reserves (IOR) rate, and the Fed Funds rate may decrease by about two basis points as a result. However, the effectiveness of this strategy still depends on the willingness of market participants to use the Standing Repo Facility (SRF) tool. With the Fed officially stopping the contraction of its institutional debt and MBS holdings in December, and expanding its Treasury holdings through reinvestments and reserve management operations, the funding market has entered a new phase from "balance sheet reduction" to "reserving sufficiency." In the context of the US Treasury Department increasing its borrowing efforts and short-term rates becoming increasingly sensitive to funding conditions, the Fed's operations have become a key variable in balancing the supply of 2026 US Treasuries and the trend of short-term interest rates.