HALISTER1: RESEARCH ROUNDUP: Fed Minutes Signal Dec. Roll-Off Announcement

RESEARCH ROUNDUP: Fed Minutes Signal Dec. Roll-Off Announcement

(Bloomberg) -- Minutes of FOMC’s March 14-15 meeting signal that an announcement to taper or cease agency MBS, USTs reinvestments is most likely to come in December, based on published research from economists and strategists.
  • Such announcement by year-end is coming sooner than many had previously expected; Evercore, JPM expect a roll-off plan to come after two more rate increases in June, September
  • See also: It’s Fed Versus Market as Traders Bet Balance Sheet Will Slow Hiking; Fed’s Williams Sees Balance Sheet Shrinking Taking Five Years
  • Bank of Tokyo-Mitsubishi (Chris Rupkey)
    • MBS holdings are likely to fall much more quickly than USTs, once Fed ceases or phases out reinvestments
    • Fed officials took pains to say they stand ready to change their views, put markets on notice that rates may have to go up more quickly if economy picks up steam
    • Rates are not going up faster just because they wind down QE holdings
  • Bloomberg Intelligence
    • Balance-sheet unwind could impact timing of rate increases in 2H
    • While there was little change to outlook, balance of risks appear to be tilting to the upside
    • MORE
  • BNP (Steve Friedman)
    • BNP now expects actual roll-off to start in 4Q, after FOMC makes a decision at either its Oct. 31-Nov. 1 or Dec. 12-13 meeting
    • Had previously expected roll-off to begin next January after 25bps increases in June and September, and a decision in December to begin shrinking balance sheet
    • Number of details still need to be filled in, such as whether FOMC will target roughly equal amounts of run- offs from both USTs and agency MBS
  • BofAML (Mark Cabana)
    • Portfolio reduction, through maturities of both UST and agency MBS, should start once fed funds target rate is between 1.25%-1.5%
    • Tapering should occur over a one-year period; this should result in higher UST term premium, wider MBS spreads, narrower front-end swap spreads
    • Fed will likely not use asset sales as part of process
  • Evercore (Krishna Guha)
    • Minutes are sign that roll-off will likely begin in December, after rate hikes in June and September
    • Fed appears to be looking to minimize risk of abrupt adjustment in MBS market
    • It may not be possible for Fed to indicate what balance- size size and composition it’s aiming for
    • MORE
  • JPM (Michael Feroli)
    • FOMC’s discussion on balance-sheet normalization was somewhat hawkish relative to JPM’s expectations; starting policy-induced tightening by year-end may explain why median FOMC dot remained at three hikes for 2017, instead of moving to four
    • Fact that Fed is considering ceasing reinvestments all at once reflects desire to get balance sheet back to normal in fairly compressed timeframe; JPM previously thought Fed might hold off on changing UST reinvestment policy
    • JPM still expects hikes in June and September, raises number of rate increases it expects for 2018 to three from two previously
  • Morgan Stanley (Matthew Hornbach, Guneet Dhingra)
    • Best course for Fed is to stop only MBS reinvestments
    • Ending just MBS reinvestments, and leaving UST policy unchanged, would help Fed avoid market volatility and make communications easier
    • MORE

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Chris Rupkey (Bank of Tokyo-Mitsubishi UFJ Ltd/The)
Guneet Dhingra (Morgan Stanley)
Krishna Guha (Evercore Partners Inc)
Mark Cabana (Bank of America Corp)
Matthew Hornbach (Morgan Stanley)

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