Halister News

(Bloomberg) -- FOMC’s June, September meetings “will be key risk events in the timeline toward the commencement of balance sheet normalization,” Morgan Stanley analyst Adam Richmond and strategist Matthew Hornbach wrote in May 10 note.

• Fed will likely communicate details on ceasing or phasing out reinvestments “well in advance” of any actual change
• If Fed hikes in June and September meetings and/or clarifies its intentions on reinvestment policy, “markets will react accordingly”
  • MBS spreads will drift wider, UST yields may rise toward higher end of YTD range if investors pull forward their expectations on timing of balance-sheet normalization
  • At same time, credit may be slower to react over next few months; better liquidity in UST and agency MBS could make these asset classes move first
  • Later in 2H, credit should weaken vs USTs and agency MBS as investors consider implications of shrinking balance sheet