US GOVTS OUTLOOK-Fed has bonds boxed in; risk free to roam -IFR News

From IFR News Bonds and QE;

In regard to the stimulus package, for the markets it is likely the money being allocated to the Exchange Stabilization Fund (ESF) that is of the most import. The fund (thought to be roughly $450 bn) is to be held by Treasury to then be used to backstop/insure Federal Reserve interventions into the various markets (corporates, mortgages, municipals, CP, etc.) where the potential is for the Fed to leverage up buy as much as 10X the size of the ESF or theoretically buy up to $4 tn in financial assets.

This does appear to be a game changer for these markets. It will take a bit of time to get the Fed’s ESF related buying programs up and running but once they do both their “stock and flow” impacts will likely be that of shock and awe. Look for the more intrepid in the markets (hedge funds etc.) to front-run the Fed bring in more buying power into these markets.

As far as the UST complex is concerned for the time being the Fed has it ring-fenced with its unyielding large scale asset purchases $75 bn a day with $50 bn in MBS purchases) that for the time being are open-ended in their time duration. While unsustainable, until the Fed relents it will likely relegate the UST complex to a contained if choppy/volatile range where the buying of dips is to be favored with selling of strength to also be pursued if to a lesser extent. The moves on the curve are also expected to be choppy and mainly revolve around what maturities the Fed is buying at any given time along with the maturity buckets pending in the Treasury coupon auction cycle.

Speaking of cycles, the approach of month-end is receiving a lot of market chatter on potential portfolio rebalancing flows. Expectations are that upwards of $165 bn in funds may move out of bonds to buy equity markets. Hard to take this to the bank as it wouldn’t be surprising to see some of these portfolios hit the pause button for the time being given the exigent circumstances.

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