Looking Ahead

The trouble with "stability" is you end up over analyzing every move as significant. By the time its accepted that the landscape has settled, something actually pops up to disturb it.

So it goes with the Fed and the hand-off formerly known as "Exit." In the near term, the Death Star is reversing much larger amounts than the Fed is buying as the economy stumbles forward and tax receipts roll in. If one had suggested 150+B reverses could be conducted daily without a Bp blip or hiccup 10 years ago, you'd have been laughed off the trading floor. (I witnessed a 20bp hit in the 80's on a TT & L call !![GIK])

The longer term meme into 2016 will be a revisit of a popular fear from QE1 : Who will buy the debt when/if the Fed doesn't ?As veteran MS Treasury watcher Ted Weisman points out, "The halting of Fed re-investment will create a dramatic shift to borrowing from the public" over the next 2 years. Because of Operation Twist, the Fed holds little in the way of 0 -2 paper. This presents an opportunity to halt rollovers "early" to little supply/demand disruption, roughly 4b according to MS. However, if FG applies to re-investment also, then the shift for 2016 would require "others" to pick up 216B in securities currently taken by Yellen & Co.

The Fed would still be nurturing a growing economy (we hope) and thus Coupon Passes would re-emerge as a standard tool for monetary base purposes. The Open Market Desk will be tasked with balancing the base against the reduction in the portfolio. This exercise highlights why we have promoted "growing into" the fed balance sheet rather than rant for its reduction. Pension liability matching has aided the bid for paper during this "stable" phase. Soon, the empty chairs at PD FI desks (playing now as Agent Only) are going to be asked to do some heavy lifting.

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