Fed to resume Treasury purchases in early 2026, providing reprieve for U.S. economy

After three years of balance sheet shrinkage, the Federal Reserve is preparing to return as a major buyer of U.S. Treasuries early next year. Investors and analysts view the move as a signal that the central bank intends to stabilize markets and ease concerns over the government's borrowing prospects.

The Fed plans to resume its purchases of Treasuries in the first quarter of 2026

Officials confirmed that asset purchases would begin in the first quarter of 2026, ending a period of steady balance sheet reduction that began in 2022. The announcement followed growing signs that further tightening could disrupt funding markets.

Federal Reserve Chairman Jerome Powell has indicated that the Fed plans to let reserves grow again as the banking system and the overall economy expand. Analysts interpreted his remarks as confirmation that the central bank is ready to expand its balance sheet again.

Marco Casiraghi of Evercore ISI estimated that the Fed would start buying Treasuries in the first quarter of next year, with balance sheet expansion likely by March. He estimated purchases of Treasury bonds at about $35 billion per month, which would translate into a $20 billion monthly increase in the Fed's $6.6 trillion balance sheet.

Powell's comments and Casiraghi's projections come as U.S. markets regain their composure after months of anxiety over government borrowing needs. Fund managers are increasingly confident that the Fed's measures will help ease concerns about debt sustainability.

Crypto sees opportunity as tightening cycle comes to an end

The Fed's quantitative tightening (QT) program began in 2022 to reduce Treasurys and mortgage-backed securities accumulated during pandemic-related stimulus. QT has since drained reserves primarily through the Reverse Lending Facility, which at its peak in 2022 held $2.6 trillion in eligible corporate liquidity. This facility now shows almost no activity, suggesting that most of the excess liquidity has already been absorbed.

With the tightening almost complete, Fed policymakers aim to prevent reserves from falling too far. Balance sheets remain well above pre-pandemic levels, significantly higher than the $4.2 trillion recorded at the start of 2020. Still, officials want to maintain sufficient liquidity to keep the financial system functioning smoothly.

Treasury yields fall as Fed plots controlled balance sheet expansion

Casiraghi and other analysts expect the new procurement program to follow a measured, technical approach rather than a stimulus-driven approach.

Key aspects of the Fed's upcoming plan include:

• Timeline: Treasury purchases are scheduled to begin in the first quarter of 2026, with balance sheet growth expected by March.
• Scale: About $35 billion in monthly Treasury purchases, increasing holdings by about $20 billion per month.
• Asset mix: A gradual reduction in mortgage-backed securities as attention returns to Treasuries.
• Objective: Support the proper functioning of markets, not inject emergency liquidity.
• Result: Maintain sufficient reserves for the effective implementation of monetary policy.

Markets reacted positively to signs of renewed channeling of asset purchases. The 10-year U.S. Treasury yield, often considered a global benchmark for borrowing, fell from 4.8% in January to below 4.1% amid growing confidence that rate cuts and balance sheet expansion are approaching.

Falling yields ease pressure on liquidity and support crypto outlook

Mark Cabana, head of U.S. rates strategy at Bank of America, noted that investors appear “much less worried about supply pressures” as expectations of Fed purchases rise. He added that concerns about the deficit have eased thanks to stronger tariff revenues and the likelihood of new demand for Treasury bills from the central bank.

Yields across the curve also adjusted, with the spread between 10-year Treasuries and interest rate swaps narrowing to about 0.16 percentage points. Compared to the start of the year, this figure represents a decrease in interest rate points.

Long-term bonds have also compressed compared to shorter maturities, with the 30-year yield now only one point above the 2-year yield, compared to more than 1.3 points in September.

Casiraghi stressed that the Fed does not intend to extend its tightening program, noting that liquidity conditions are already ample. Rather than boosting growth, future asset purchases will aim to maintain a stable level of reserves in the financial system.