The U.S. Federal Reserve amassed quite a bond portfolio over the past couple of years, but now it’s beginning to map out how it’ll unload its holdings in 2022.
2020, of course, saw the Fed go on a shopping spree to help shore up the debt market, including a number of purchases in bond-focused exchange traded funds (ETFs). The Fed diversified its holdings with investment-grade and even riskier debt as the pandemic was picking up steam.
As such, that portfolio turned into $8.76 trillion in holdings, and even with the threat of the Omicron variant, the Fed was already tapering off its bond purchases. Now comes the time to start expunging as the inflation narrative also weighs heavy on the capital markets in addition to COVID-19.
“At their policy meeting last month, officials agreed to wind down their bond-purchase stimulus program more quickly amid growing concerns about high inflation, setting it on track to end in March,” the Wall Street Journal reports. “Officials began discussing at that meeting what should happen to the bond holdings after that point, and some are pushing to start shrinking them sooner and faster than they did after an earlier asset-purchase program.”
With the economy able to stand on its own two legs and start sprinting again, the Fed has options and is set to meet later this month on exactly how to unload its debt holdings.
“Once the Fed stops buying assets, it could keep the holdings steady by reinvesting the proceeds of maturing securities into new ones, which should have an economically neutral effect,” the WSJ says. “Alternatively, the Fed could allow its holdings to shrink by allowing bonds to mature, or run off.”
Getting Aggregate, Diversified Bond Exposure
As the Fed unwinds, prospective bond investors can look to add to their portfolio with an aggregate, diversified solution such as the Vanguard Total Bond Market Index Fund ETF Shares (BND ). BND presents bond investors with an all-encompassing, aggregate solution to getting U.S. bond exposure, making it an ideal solution for investors seeking to complement their equities exposure.
BND seeks the performance of Bloomberg U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
For more news, information, and strategy, visit the Fixed Income Channel.