Fed Balance-Sheet Unwind Could Add 50bp of Term Premia: Nomura
Alert: HALISTER1
Source: BFW (Bloomberg First Word)
People
George Goncalves (Nomura Holdings Inc)
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UUID: 7947283
(Bloomberg) -- Fed unwinding balance-sheet investments is likely to increase term premium at long end of UST curve by 35bp-50bp and widen MBS by 15bp-20bp; IG credit spreads “may initially widen at a faster pace than MBS as credit is at risk of changes in fund flows,” Nomura strategists led by George Goncalves write in Aug. 17 note.
- “The market’s benign assumption of a smooth and boring conclusion of the unwind is too rosy”
- Note examines supply/demand dynamics for USTs, MBS and credit of banks, foreign investors and domestic money managers
- Banks are unlikely to absorb majority of Fed’s portfolio runoff because their securities holdings “tend to grow only when there is excess deposit above and beyond the needs of the loan book”
- Overseas investors -- official and private -- are likely to favor front-end “even more than usual” because of duration concerns, leading to a steeper curve
- Domestic money managers are “least likely to make more UST purchases” because of preference for higher yields
- Viewed by asset class, USTs require most sponsorship from overseas investors, MBS and credit will depend most on domestic money managers
Alert: HALISTER1
Source: BFW (Bloomberg First Word)
People
George Goncalves (Nomura Holdings Inc)
To de-activate this alert, click here
To modify this alert, click here
UUID: 7947283