READ this if you dont understand why the market keeps grinding up while the QT is in progress.

The Fed has communicated a shift towards a tighter monetary policy. Despite this, there has been a notable increase in liquidity, with a $500 billion rise over the past year (see chart below).

Even as the Fed's bond holdings have diminished by $1.4 trillion from their peak, the bank reserves—essentially the liquidity pool—have experienced an uptick since the commencement of QT in June 2022.

How QT is supposed to work?

Fed does not reinvest in maturing bonds, effectively reducing the reserves or liquidity. This necessitates that banks play a larger role in accommodating the influx of newly issued securities, thus traditionally leading to a decrease in reserves or liquidity as the Fed trims its balance sheet.

However, the current landscape deviates from the norm.

In 2021, facing 0% interest rates and excessive monetary supply, the Fed faced challenges. The demand for T-Bills was so high that yields nearly dipped into negative territory. To counteract this, the Fed introduced the Reverse Repo Facility (RRP), a move designed to stabilize money markets by enabling Money Market Funds (MMFs) to deposit funds with the Fed, which ballooned to $2.5 trillion in usage.

This strategy effectively sidelined a significant amount of liquidity within the financial system. Recently, there's been a notable deployment of this dormant liquidity into the market, as evidenced by a substantial decrease in RRP usage (see chart below). Concurrently, with the issuance of T-Bills, MMFs have actively participated, reducing the RRP's balance and injecting liquidity into the market.

Thus, despite the Fed's balance sheet contraction, the anticipated reduction in excess liquidity hasn't materialized, as MMFs compensate for the reduced bank reserves. This phenomenon indicates a disconnection between the Fed's policy of tightening through QT and its practical impact.

The Treasury's T-Bill issuances are being readily absorbed by MMFs, alleviating potential liquidity pressures on banks. This dynamic underscores the phenomenon of a sterilized QT, where the expected tightening effects are neutralized, maintaining liquidity flow in the market.

A side note: The U.S government is accumulating $1 trillion debt every 100 days, the fatest rate in history. I highly recommend you to watch Milton Friedman's speech in 1978.

https://www.youtube.com/watch?v=r9KUVqUZT0Y