The Federal Reserve has stepped back into the short-term Treasury market to support system liquidity, even as it continues to let mortgage bonds roll off its balance sheet—a combination that keeps pressure on long-term borrowing costs.

A tactical shift:

After briefly halting balance-sheet runoff, the Fed announced roughly $40 billion per month in purchases of short-dated Treasuries aimed at maintaining reserve levels and reducing funding market stress. Officials have indicated these operations will be scaled back as conditions stabilize, likely by spring.

Stress in overnight funding:

Recent volatility in overnight benchmarks such as SOFR and TGCR underscores mounting strain in the repo market. The Fed’s intervention is designed to smooth these disruptions and prevent spillovers across banks and other financial institutions.

Long rates stay stubborn:

Despite improved short-term liquidity, the Fed is still shrinking its holdings of mortgage-backed securities. That policy choice continues to support higher long-term yields. Pimco has suggested that stopping MBS runoff could compress mortgage spreads by 20–30 basis points—but that potential easing has yet to materialize.

Divided market response:

Some strategists, including at Morgan Stanley, interpret the move as a signal that inflation risks are easing. Others argue the opposite—that the need to sustain elevated reserve levels reflects underlying system fragility. Skeptics also note the timing aligns neatly with the Treasury’s heavier reliance on short-term bill issuance.

➥ THE BOTTOM LINE

Little relief for CRE: While the Fed’s short-term Treasury purchases may calm funding markets, ongoing MBS runoff keeps long-term rates—and commercial real estate borrowing costs—firm. For now, meaningful relief remains out of reach.