Treasury issuance vs. Fed’s QE | Global Macro Strategy-Morgan Stanley

From Morgan Stanley Bold prints are my own


Cross-currents of Treasury issuance vs. the Fed’s QE have been driving Treasuries. We think the Fed will switch to buying more long-end Treasuries, and the Treasury will complement the Fed by increasing issuance largely in the front end. Both the Fed and Treasury’s actions support being long 30s.
We think the Fed is likely to buy more back-end Treasuries as it switches from liquidity-focused QE to portfolio balance channel-focused QE. We see the Fed switching to a more regular monthly QE schedule, as it tapers the daily Treasury purchases. We see the Treasury complementing the Fed’s actions by focusing issuance in the front end of the curve.

We see the Treasury adopting a neutral issuance strategy by maintaining the weighted average maturity (WAM) of issuance around or slightly below current levels. In a recent presentation in February, the Treasury Borrowing Advisory Committee (TBAC) has already advised the Treasury to not offset the Fed’s actions in QE. While the TBAC presentation in February was intended as a long-term planning suggestion, the conclusions lend themselves well to the current environment. We think both the Fed’s and the Treasury’s actions support being long back-end Treasuries.

We continue to suggest investors stay long 30-year bonds, and add more if yields rise above 1.50%. Our economists see a ~$3.7 trillion deficit needed to be financed in CY20, which we think will be financed with a combination of $2.4 trillion net bill issuance and $1.3 trillion net coupon issuance. We detail our expected monthly coupon forecasts based on these projections.

We continue to expect the 20-year note to be issued starting in May. T-bills as a % of total outstanding UST debt will increase from 13% presently to 21% by the end of 2020. This 8pp increase is similar to the increase in the nine months between June 2008 and March 2009.
(Morgan Stanley)

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