Halister News

(Bloomberg) -- A “complete halt” to the Fed’s UST reinvestments is unlikely because it would make the Fed’s balance sheet unwind anything but gradual, Credit Suisse strategists led by Praveen Korapaty say in note.

• The “sheer size of securities set to roll off over the next few years” at ~$600b/year, two-thirds of which are Treasuries, would make a complete halt of reinvestments unlikely
• Continue to believe that MBS initially will constitute a larger fraction of the balance sheet shrinkage
• An organic balance sheet shrinkage may end up “dominating rate hikes as a source of tightening,” contrary to the Fed’s preference for using rate hikes as the “primary policy tool”
• Normalization won’t be smooth given the “chunky maturity” schedule for USTs
• Growth in the Fed’s liabilities may also constrain balance sheet shrinkage
  • If the Fed allows a faster balance sheet runoff by halting UST reinvestments next year, it may have to reverse course only a few years later
• Once reinvestments end, Treasury may decide to rely on bills before phasing in larger coupon auction sizes
  • Bills are “traditionally the shock absorber” and volatility in auction sizes is “far more the norm for that sector” than for coupon issuance, where Treasury’s “regular and predictable mantra reigns supreme”