The Fed is Buying Treasuries Again

I keep some cash in a money-market fund. Most people do these days. The yield is 4-and-change. It comes from Treasury bills.

That is the whole business.

You give the fund a dollar. They lend it to the Treasury. They pay you the interest.

Simple. Boring. It has worked for decades.

But in December, something changed.

The Fed started buying those same Treasury bills. Forty billion dollars a month. More once you count the mortgage reinvestments. It named these purchases “Reserve Management Purchases.” Not QE. Just management.

I stared at that word for a while.

Because the Fed had spent three years telling everyone it was doing the opposite. Quantitative tightening. It sold or ran off $2.4 trillion of assets. Reserves fell. By last October, the plumbing was showing strain. So the Fed reversed.

Fifty-five billion a month.

The Fed and the Treasury, matching pockets. In 2026 alone, the Fed will buy something close to $540 billion of Treasury bills.

That is not the strangest part.

On April 1, another agency did something different. The bank regulators cut a core capital rule for the largest U.S. banks. They cut required Tier 1 capital at the bank subsidiaries by an average of 27 percent — about $213 billion of freed capacity. The stated purpose, right there in the rule text, is to help those banks buy more Treasuries.

So the Fed buys bills. Regulators cleared banks to buy more bills. And the Treasury is issuing bills at a pace nobody has matched in modern history — 85 percent of net new debt today, up from 70 percent a decade ago.

Everyone in the room is a buyer.

I know how this sounds. Boring. Plumbing. Not the kind of story that ends up on CNBC. But every crisis I have ever read about started here — in the wiring, the collateral, the overnight funding. In September 2019 the repo rate jumped from 2 percent to over 8 percent in a single day. In March 2020 it happened again. Both times the Fed had to step in.

So when I see a permanent reversal of tightening, a rule change that hands banks $213 billion of new capacity, and a Treasury issuance mix with no precedent, I want to know why.

That is what this week is about.

There is a difference between saying you stopped and stopping. Announcing the end of quantitative tightening is not the same as running the unwind. What the Fed announced in December was neither.

At the December 10 FOMC meeting, the committee ended QT after three years. That much was expected. Then it did something more.

The FOMC directed the New York Fed to start buying Treasury bills again. Not as an emergency. Not because of a crisis. Principal payments from the mortgage-bond portfolio would also roll into T-bill purchases. And the $500 billion daily cap on emergency repo operations, in place since 2021, was eliminated.

Roberto Perli, who runs the New York Fed's markets desk, gave a speech yesterday. He said these purchases are “not intended to change the stance of monetary policy.” They exist to keep bank reserves at what the Fed calls an “ample” level.

Chairman Warsh has appointed a task force to review the Fed's whole balance sheet framework.

The Fed's Treasury holdings have grown by about $284 billion over the past year. That is not the size of maintenance. It is the size of a policy.

And here is where the pattern spreads.

On November 25, 2025, the Federal Reserve, the OCC, and the FDIC did something none of them had done in the eleven years since Basel III capital rules were finalized. They cut a core capital requirement for the largest U.S. banks.

The rule is called the enhanced supplementary leverage ratio. eSLR. It applies to eight U.S. banks: JPMorgan, Bank of America, Citi, Wells Fargo, Goldman, Morgan Stanley, State Street, and BNY Mellon.

Until April 1, 2026, their bank subsidiaries needed to hold at least six percent Tier 1 capital against total balance sheet exposure. Now the requirement varies by firm but averages just over four percent.

The phrase "Treasury market intermediation" appears in the final rule 47 times.

The stated reason, in the final rule text itself, is to help these banks buy more Treasuries. The regulators call the eight banks the primary intermediaries between the Treasury and the rest of the market.

Now those intermediaries have $213 billion of newly-freed balance sheet capacity. The proposal drew 240 comment letters. About half were opposed. The rule was finalized anyway.

Meanwhile, the Treasury's own math has been changing.

For most of American history, the Treasury financed itself with a mix of bills, notes, and bonds. Bills mature in a year or less. Notes and bonds carry the longer stuff. The old ratio was maybe 15 to 25 percent bills, with the rest at longer maturities.

That mix has broken.

Treasury bill issuance now runs at 85 percent of net new debt. A decade ago the number was 70. Twenty years ago it was in the low 20s. The February 2026 Treasury Borrowing Advisory Committee memo projected the bill share staying near 85 for at least the next two years.

Bills mature fast. The whole stock turns over more than once a year. If the market ever refuses to roll them at anything close to the current rate, the Treasury faces an instant funding hole measured in the tens of billions of dollars per week.

That is exactly the risk the Fed and the regulators have positioned themselves against. Their answer is to become the buyer when nobody else steps up.

Three more things worth keeping track of this week.

First. The Chinese yuan is strengthening. On July 9 the People's Bank of China set its daily fix at 6.8036 per dollar — above the 6.80 line for the first time since 2023. Most of Wall Street had positioned for the opposite. The 2018-2019 playbook was for Beijing to weaken the yuan to buffer growth. Instead, they have let it appreciate 4.1 percent over the past year, the biggest annual gain since 2020. Chinese state media is now warning against betting on further one-way appreciation. Something changed in Beijing's currency logic and the market has not caught up.

Second. France's 10-year OAT-Bund spread sits at 83 basis points, near the level it traded during the 2012 eurozone debt crisis. France ran a 5.4 percent deficit last year. It is projected at around 5 percent this year. Public debt is on track to pass 125 percent of GDP by 2030. Two prime ministers have fallen already over the 2026 budget. The ECB has a bond-buying tool that could defend France if things get worse — but France is in the eurozone's Excessive Deficit Procedure, which makes using that tool legally awkward. A slow-motion standoff, priced in one basis point at a time.

Third. Silver is still in backwardation on COMEX — the near-term contract trades above the deferred one, the opposite of a normal futures curve. It has been that way since late 2025. Shanghai physical silver trades at a 12 to 13 percent premium to the LBMA London price. COMEX registered inventory covers only about 13 percent of open contracts. The Silver Institute expects 2026 to be the sixth consecutive year of physical deficit. The January price spike to $121 unwound to the $70s. The physical structure did not unwind with it.

We'll see.

April 1942. The United States had just entered a war. The Treasury needed to borrow. Fast. More than it had ever borrowed before. And it wanted to borrow it cheap.

So it went to the Fed with a request.

Fix the interest rate. Hold three-month Treasury bills at three-eighths of one percent. Cap the long bond at two-and-a-half. Buy whatever the market will not.

The Fed agreed.

The peg held for the whole war. Then it held after the war. Through 1946, 1947, 1948, 1949. Six years of peacetime. In one twelve-month stretch, CPI inflation ran 17.6 percent. Between March 1942 and August 1945 the Fed bought about $13 billion of Treasury bills — 87 percent of every bill the Treasury issued.

Nobody used the word QE. That word did not exist yet.

The peg finally broke in February 1951. Treasury Secretary John Snyder was in the hospital for cataract surgery. His assistant, William McChesney Martin, met with Fed officials and negotiated a compromise. On March 4, 1951 they announced what became known as the Treasury-Fed Accord. Martin was 44 years old. Two weeks later Truman appointed him Chairman of the Fed.

Nine years to build the arrangement. Twelve days of cataract surgery to end it.

I do not know if what the Fed is doing now becomes another 1942. Central banks buy government debt all the time and nothing terrible happens. But the pattern rhymes.

A Treasury with a growing hole to fill. A central bank buying short-dated paper to keep the plumbing running. Bank regulators clearing the way for banks to hold more of the same paper.

Every seam patched.

Once you get into that arrangement, it is hard to leave.

Especially when someone else is doing the buying.

We'll see.