The Fed has since 2010 been expanding its tri-party reverse repo counterparties, those which it will eventually use for temporary open market operations to drain the trillions of dollars in reserves that have been added to the banking system as a byproduct of the expansion of the central bank's balance sheet. The counterparties, which historically were solely the Fed's primary dealers, now includes firms such as money market mutual funds, government sponsored agencies, banks and savings institutions.
Eoin Treacy's view As governments have taken on progressively more private sector debt and quantitative easing programs have swelled the balance sheets of central banks to previously unimagined levels, policies have been put in place to ensure that there are willing buyers for all this new paper.
Regulatory changes in the UK centring on what pension and insurance companies can class as Tier 1 capital have forced them to hold Gilts regardless of whether they think it is a good idea or not. The Fed's actions to bring more types of investors into the fold of the Treasury market can be viewed in the same light. The Liquidity ratio introduced via Basel III requires that a bank hold “ sufficient high-quality liquid assets to cover its total net cash outflows over 30 days“. Regardless of the rationale, this ensures they hold more government bonds than might have otherwise been the case.
It is therefore interesting that despite these machinations government bond yields have in general been rising. US 10-year Treasury yields continue to range in the region of the psychological 2% and a sustained move below the 200-day MA, currently near 1.85%, would be required to question medium-term supply dominance.