Increases in the Fed Funds rate should not be feared by asset markets. Quantitative Tightening ("QT) is little understood, but is the primary force with which investors should be wary.

1. Quantitative Tightening
A Leviathan Awakens
Blake Huber, Trading & Investing Working Group
January 6, 2023

2. 2
DISCLAIMER & INVESTMENT RISKS
Investment Risks
All investments involve substantial risk of loss. Consult a professional investment advisor and make independent investigations before acting on information published in this document. Information in
this document is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable but are without our independent verification;
therefore, cannot be assumed accurate or complete. We do not in any way whatsoever warrant or guarantee the success of any action you take in reliance on statements or recommendations contained
in this document.
Past performance is not necessarily indicative of future results. All investments carry significant risk and any and all investment decisions of an individual remain the specific responsibility of that
individual. There is no guarantee or liability assumed by the authors that will result in profits or that actions taken on information contained herein will not result in losses. All investors are advised to
fully understand all risks associated with any kind of investing they choose to undertake.
Hypothetical or simulated performance is not indicative of future results. Unless specifically noted otherwise, all return examples provided are based on hypothetical or simulated investing. The authors
make no representations or warranties whatsoever that any investor will, or is likely to, achieve profits similar to any shown, because hypothetical or simulated performance is not necessarily indicative
of future results.
Invest only after consulting a licensed investment professional. Do not enter any investment without fully understanding the worst-case scenario for losses that may be associated with that investment.
Forward Looking Statements
Various statements contained on this website, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements.
These forward-looking statements may include projections and estimates concerning the timing and success of strategies, plans or intentions. Forward-looking statements on the authors’ current
expectations and assumptions about future events. Investors should not rely on these forward-looking statements without first conducting independent due diligence. The authors undertake no
obligation to update any forward-looking statements to conform to actual results or changes in expectations, unless required by applicable law.
No Offer of Securities
Under no circumstances should any material in this document be considered as an offer to sell or a solicitation of any offer to buy an interest in any investment.

3. Quantitative tightening (QT) is a contractionary monetary
policy tool applied by central banks to decrease the amount of
liquidity or money supply in the economy. A central bank
implements quantitative tightening by reducing the financial
assets it holds on its balance sheet by selling them into the
financial markets, which decreases asset prices and raises
interest rates.[1]

4. Implementations of QT
1. Maturity Roll-Off. Reduction of on balance-sheet assets
via roll-off at maturity; maturing bonds are not replaced.
2. Raising Fed Funds Rate (Proxy IORB rate). Increases drain
liquidity as banks park greater reserve amounts at the FED.
Fed has raised the rate it pays on reserves from 20 bps (Mar
2022) to 4.10% (Dec 2022). IORB rate currently 4.40%.
3. Active Selling. Outright asset sales to remove assets
from the balance sheet prior to maturity
MARKET
DISRUPTION
MAX
MIN

5. Quantitative Tightening
It Begins.

7. Bundesbank President Joachim Nagel
argued that the European Central
Bank probably doesn’t need to
manage a planned roll off in its bond
portfolio, highlighting “sufficient
resilience” in financial markets.

8. “The European Central Bank will
likely accelerate the pace at
which it offloads government debt
accumulated during past crises
from July next year as part of its
fight against soaring inflation.”
-- Francois Villeroy,
Governing Council member

11. Central banks including the Federal Reserve have in the past set
limits to how quickly they allow their balance sheet to shrink
to ensure investors don’t balk at so-called quantitative tightening.
The issue of caps hasn’t really come up in the public debate in the
eurozone, where this month policymakers are due to decide on
the key pillars of their strategy to unwind debt of nearly €5 trillion
($5.2 trillion).
Nagel Hints at ECB QT Without Caps, Praising Market Resilience, Bloomberg.com. 12/02/2022.

12. Reverse Repo Operations
Understanding the Federal Reserve’s nominal
tightening mechanism

13. Overnight Repurchase Agreements -- A Refresher
● Method for draining liquidity via reducing
bank reserves in the banking system
● Banks paid $ billions on reserves parked @
FED
● Banks prefer FED payment over making loans
(zero default risk)

14. Overnight Reverse Repurchase Agreements | 2008
Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations
$25 Billion USD

15. Overnight Reverse Repurchase Agreements | 2014-2015
Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations
$340 Billion USD PEAK

16. Overnight Reverse Repurchase Agreements | 2015-2016
Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations
$475 Billion USD
$200 Billion USD

17. Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations
Overnight Reverse Repurchase Agreements | 2003-2020
$340B
2014 - 2015
$25B
2008
$475B
2015 - 2016

18. Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations
Overnight Reverse Repurchase Agreements | 2003-2022
$340B
2014 - 2015
$25B
2008
$475B
2015 - 2016
$2.55 Trillion, as of 12/30/22

19. Financial Conditions Indices
Cumulative measures of credit and money restrictions
in the real economy

20. Financial Conditions | 1970’s Inflation (1971 - 1986)
Peak index @ 5

21. Financial Conditions (COVID 2020)

22. Financial Conditions (1971 - Dec 2022)
CMBS Crisis /
Lehman Bankruptcy
Volker Era
Tightening Campaign
(10Y Bond Yield > 10%)
COVID
Economic Shutdown
1970’s Inflation
2022
Tightening Campaign

23. Financial Conditions -- Takeaways
● Despite dramatically higher interest rates over 2022, Financial
Conditions have yet to tighten materially.
Cumulative delays in monetary policy changes
combined with monetary policy feedback loop literally
ensures global central banks will over-tighten policy.
Conclusion:
● 6 to 12 month lag between monetary policy and the real economy.
● Additional lag between real economy and changes in central
bank policy.

24. EuroDollar Market
International Perspective on Effectiveness of Global QT

25. Eurodollar - International Fixed Income USD Market
● Eurodollar Market: rate paid on USD deposits outside the
US financial system (i.e. International banks)
● Untainted. Eurodollar market external view of U.S. fixed
income market without U.S. Federal Reserve interference.
● Early Warning. Eurodollar term structure first inverted in
late 2021 foreshadowing severe economic slowdown
predating U.S. Treasury curve inversion by 6+ months
● Record Inversion. As of now (Dec 2022) record term
structure inversion across all maturities out to 2025+

26. Normal Eurodollar term structure
Later maturities trade @ high yield
Near-term maturities
(Mar 2023)

27. TERM STRUCTURES SHOULD
BE UPWARD SLOPING
RECORD
INVERSION
2021

28. Conclusions
Putting It All Together

29. Overall Conclusions -- Putting It All Together
1. Global central banks are in process of draining liquidity from asset
markets on a scale without precedent.
2. Policy delays ensure impact of tightening effects not yet seen in
global markets.
3. Despite brutal sell-off in global equity and bond markets, Financial
Conditions Indexes show financial conditions have yet to tighten
materially.
4. Conclusions 1-3 above portent high probability that global central
banks will over tighten policy materially.

30. APPENDIX