Toro
Diamond Member
All that liquidity has to go somewhere.
Not really, it can just sit in excess reserves earning 25 basis points.
That's "somewhere." It can go other places too.
If a portfolio's assets and liabilities are duration matched at, say 4 years, and the Fed buys your bond, the duration of cash is zero, and now there is a mismatch. So the investor takes the cash and buys something else to match duration again at 4 years, pushing up the price of the asset. And voila! The liquidity went somewhere.