What Happens to Baa-10Y Treasury Spread When the Fed Balance Sheet Expands?
What happens when the Fed restarts balance sheet expansion (QE)? Risk asset response, inflation implications, and historical precedents.
How Baa-10Y Treasury Spread Responds
Scenario Background
The Fed's balance sheet (WALCL - Working Assets of the Consolidated Federal Reserve) consists primarily of Treasuries and mortgage-backed securities acquired during quantitative easing programs. Balance sheet expansion (QE) occurs when the Fed purchases securities, crediting reserves to the banking system and injecting liquidity into financial markets.
Read full scenario analysis →Historical Context
The Fed balance sheet expanded from $900B in 2008 to $4.5T by 2015 through QE1-QE3. It then ran off gradually until the September 2019 repo spike forced re-expansion. COVID emergency actions expanded the balance sheet from $4T to $9T between March 2020 and March 2022. The BTFP (March 2023) added roughly $400B temporarily. Each major expansion coincided with S&P 500 gains of 15-35% in subsequent 12 months and Bitcoin gains of 100-500% in extended liquidity cycles.
What to Watch For
- •Fed statements signaling QT end or QE restart
- •Credit spreads widening sharply
- •Bank reserves below $3T
- •Funding market stress (SOFR spikes, repo dislocations)
- •Liquidity-sensitive assets (BTC, long-duration tech) outperforming
Other Assets When the Fed Balance Sheet Expands
Other Scenarios Affecting Baa-10Y Treasury Spread
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