No, SOMA Reinvestment Is Not QE: How to Tell the Difference

This is going to be a long write up but it needs to be said as seasoned fund managers get this very, very wrong. As Treasury supply continues to surge and the Federal Reserve shifts the pace of its balance sheet reduction, many market participants (including seasoned fund managers) are misreading the Fed’s actions mistaking SOMA reinvestment for a stealth return to quantitative easing (QE). Let’s be clear, this is not QE. Here’s why, and how to spot the difference with data.

Source: X.com

Firstly, what is SOMA? The System Open Market Account (SOMA) is the FEDs operational portfolio, composed primarily of US Treasuries, agency debt, and mortgage backed securities (MBS). Managed by the New York Fed, SOMA serves as the vehicle through which the Federal Open Market Committee (FOMC) implements monetary policy. Depending on policy objectives, SOMA can operate in three distinct modes: (1) Quantitative Easing (QE), where the Fed buys securities outright, expanding its balance sheet and injecting liquidity into the banking system. 2) Quantitative Tightening (QT), where the Fed lets securities mature without reinvestment, reducing the size of its balance sheet and withdrawing reserves (3) Reinvestment, a neutral stance in which the Fed replaces maturing securities with new ones to maintain its balance sheet at a constant level. Each mode influences the flow of liquidity, reserve balances, and interest rates differently, making SOMA a core instrument in the Fed’s monetary transmission framework. So when the FED does quantitative easing (QE) a monetary policy tool in which the FED expands its balance sheet by purchasing securities, primarily US Treasuries and mortgage-backed securities, outright through the SOMA portfolio, these purchases inject new reserves into the banking system, increasing overall liquidity and encouraging lending. This action also pushes down interest rates, making borrowing cheaper. It also encourages investors to move into riskier assets like stocks. As you can see below, from 2020 to 2025, the FED dramatically expanded its holdings of US (SOMA portfolio) Treasury securities and mortgage-backed securities through QE in response to the COVID-19 pandemic. This led to a sharp rise in the Fed’s balance sheet, injecting trillions in liquidity to stabilize markets. Starting in 2022, the Fed shifted to QT by allowing assets to mature without reinvestment, gradually shrinking its holdings. By 2025, the pace of QT slowed slightly, with some reinvestment occurring but overall, the Fed’s portfolio remains well below its pandemic peak.

Source : NY FED

Recently, however the FED said it would reduce the pace of its balance sheet runoff from $25B to $5B per month (there is a cap of $25B per month). This means the FED will now allow only $5B in Treasuries to mature each month without reinvestment, while the remaining $20B in maturing proceeds will be reinvested into new Treasury securities. In effect, the FED is still shrinking its balance sheet but at a slower rate. This move does not represent a return to quantitative easing; rather, it's a moderation of quantitative tightening, intended to ease the strain on funding markets while maintaining a broadly restrictive policy stance. In the graph below, you can see that, the spike from QE in 2020, the slow decline from 2022 to 2024 due to QT and the flattening due the change in policy in 2025 (slowing the pace of the runoff).

Source : FRED

Why did the FED reduce the runoff? Well there are many reasons but a large reason is to ease tightening pressure on the financial system without fully ending quantitative tightening. With reserve balances declining and the RRP facility nearly depleted, the risk of liquidity stress in funding markets increased. By slowing the pace of balance sheet shrinkage, the FED aims to maintain market stability, ensure smooth Treasury issuance, and avoid an unintended drain on bank reserves, all while keeping policy restrictive through high interest rate. If the Fed kept shrinking its balance sheet too fast, it could cause stress in short-term lending markets. To prevent that, the Fed decided to slow down how quickly it's letting bonds roll off, giving the system more breathing room and helping keep things stable. With another debt ceiling debate underway, the FED may be acting proactively to cushion potential funding stresses that could arise once the debate is resolved. Similar to the events of 2019, when reserve and cash shortages emerged as the Treasury rapidly refilled its General Account (TGA) by issuing a large volume of bills, which lead to a sharp liquidity drain, triggering volatility in short-term funding markets. This kind of supply shock often leads to disorderly spikes in rates like SOFR, putting pressure on repo markets and broader financial stability (as you can see below, the SOFR daily standard deviation spiked significantly in 2019 due to tight cash conditions.)

Source - CME

So How Do I Read Treasury Auction Data Accurately?

Well lets start with the auction sheet below,

Source - US Treasury

The sheet contains details about

• Bidding types (competitive, noncompetitive, SOMA)

• Amounts tendered (offered to buy) vs. accepted

• Participants: Primary dealers, direct bidders, indirect bidders

• Interest rates and pricing info
  

You’ll see this in the breakdown of tendered and accepted amounts.

• SOMA Tendered: $14,825,704,800

• SOMA Accepted: $14,825,704,800

This Treasury auction result shows that the Federal Reserve, through its SOMA purchased $14.83B in 10yr Treasury notes. However, this is not QE. Instead, it is a SOMA reinvestment operation, meaning the FED is using proceeds from maturing securities to buy new ones of similar type and maturity. No new money is being created or injected into the financial system; the Fed is simply maintaining the size of its balance sheet by replacing expiring assets. This operation is liquidity neutral and intended to slow the pace of balance sheet runoff, not to ease monetary policy.

So How Do Traders & Investors Use This Data?

The relationship between SOMA activity and 10yr treasury yields is a critical factor for traders, and the chart provided illustrates this dynamic over the 2015 to 2025 period by plotting the Federal Reserve’s balance sheet (orange line) alongside the 10yr treasury yield (blue line). During 2019 to 2020, as the FED was completing its pre-pandemic QT cycle, the balance sheet was shrinking, and yields began to drift lower due to rising recession risk. In early 2020, amid the COVID crisis, the FED launched aggressive quantitative easing (QE), causing its balance sheet to surge as it purchased Treasuries and MBS. As a result, yields collapsed below 1%, driven by a flood of liquidity and risk aversion. Between 2021 and early 2022, the FED continued QE, expanding its balance sheet to over $8T even as inflation began to rise.

During this phase, yields remained relatively low as the market was slow to price in tightening. By mid 2022, the FED reversed course and began QT, allowing assets to mature without reinvestment. This led to a decline in SOMA holdings and a sharp rise in 10yr yields from ~1.5% to over 4%, as reduced FED demand pushed bond prices lower. In 2024 and into 2025, the FED slowed the pace of QT and partially resumed reinvestment, leading to a stabilization in the balance sheet and in yields, which have since settled in the 4 to 4.5% range. The chart captures this pattern well: QE (SOMA rising) suppresses yields, QT (SOMA shrinking) drives them higher, and reinvestment (SOMA flat) stabilizes them. Traders use this information to position in Treasury futures and ETFs like TLT, adjust equity exposure in rate-sensitive sectors like real estate, utilities, and tech, and manage macro risk depending on the Fed's policy stance.

Source - FRED

It’s easy to see why some market participants confuse SOMA reinvestment with quantitative easing (QE) after all, the Fed is still buying Treasuries, yields may dip, and risk sentiment often improves. However, the distinction lies in the mechanics. Unless the SOMA portfolio is actively expanding, bank reserves are rising, and term premiums are compressing, it’s not QE. Reinvestment is not a form of monetary stimulus; it is a neutral operation. The FED isn’t injecting new money into the system, it’s merely replacing maturing securities to slow the pace of balance sheet runoff. In short, reinvestment helps stabilize conditions but does not ease them