HALISTER1: Fed Not Likely to Shrink Portfolio as Much as Some Fear: CS

Fed Not Likely to Shrink Portfolio as Much as Some Fear: CS

(Bloomberg) -- Credit Suisse analysts led by Praveen Korapaty say they’re “skeptical” that Fed’s balance sheet will shrink as much as some may expect, based on maturity schedule of SOMA portfolio alone.
  • Fed can return balance sheet to a “steady state,” made up of all USTs, by simply letting MBS run off, Korapaty said in phone interview on Tuesday
    • CS estimates a steady state of ~$2.5t based on projections for Fed liabilities; this is roughly the size of UST portfolio at present
  • “The Fed’s stated longer-term goal is to move back to an all-Treasury balance sheet, and one way to get that is to let MBS run off”
  • To extent that end of reinvestments draws closer, “markets will have to prepare and that may lead to some re-pricing in term premia”
    • For now, “even though the duration of the Fed’s portfolio is passively declining, as long as the balance sheet’s size stays the same, we don’t think it has any tightening effect”
  • In note Monday, Korapaty and others wrote that CS continues to like “selling gamma on longer tails,” recommends rolling short TY straddles from February to March contract; also takes profits on TY 1x2 call spreads it had previously recommended
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Praveen Korapaty (Credit Suisse Group AG)

To de-activate this alert, click here

UUID: 7947283