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The Federal Reserve could soon own 12 per cent of the market for US Treasury bills, according to Oxford Economics, as it attempts to see off a repeat of the cash crunch that sent short-term lending rates spiralling in September.

Earlier this month the Fed announced it would buy $60bn of Treasury bills — government debt securities which mature in one year or less — each month until the end of the second quarter of next year.

When the Fed buys bills to expand its balance sheet, it credits commercial banks with an equal amount of reserves. The intervention aims to replenish those reserves to a level where even a spike in demand for cash will not send short-term borrowing costs significantly higher.

The Fed has begun this process in earnest, so far hoovering up more than $20bn of Treasury bills. In order to get reserves back to the roughly $1.5tn level it says is adequate for the system to run smoothly by early 2020, the Fed needs to buy approximately $300bn of the shorter-dated debt.

At that pace, the Fed will end up owning about 12 per cent of the entire bill market by early next year, according to Oxford Economics. Today it owns less than 1 per cent. During the global financial crisis a decade ago, the Fed’s ownership of Treasury bills plummeted as it begun buying up longer-dated debt as part of its quantitative easing programmes designed to stimulate the economy.

But the Fed may not have it all its own way. Given the scale of its bill-buying programme, strategists have warned it could have trouble finding enough sellers willing to part with their bills. That shortfall has not cropped up yet, though. In fact, the operations to date have seen sellers offer up far more than what the Fed has been willing to buy.

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colby.smith@ft.com



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