NEW YORK (Reuters) - The Federal Reserve will pivot to sizable buying of Treasuries in global markets as early as late 2019, despite plans by U.S. central bankers to soon stop selling securities from its $3.9 trillion inventory, according to a Wall Street rates strategist.
Priya Misra, head of global rate strategy at TD Securities, said during an interview in the Reuters Global Markets Forum online chat room on Thursday that the purchases did not constitute a resumption of the Fed’s quantitative-easing campaign launched as an emergency counter to the global recession of 2008.
The Fed has been unwinding its balance sheet - bulked up during the post-crisis years to help keep interest rates low - since October 2017. Sales have been as much as $50 billion a month.
Once begun, Misra said, the Fed’s secondary market purchases were likely to total about $250 billion in the first 12 months and would steepen, or widen differences among, interest rates paid on different U. S. Treasury debt securities.
Here are excerpts from the interview on Thursday:
Question: What can we expect from the Fed after it stops selling bonds from its inventory expected in October?
Answer: I think the Fed has to come in and buy in the open market pretty soon thereafter. We estimate $250 billion of Treasury buying by the Fed in the 12 months after runoff ends. This is a significant component of net Treasury issuance of $1 trillion a year. The buying of Treasuries will keep a lid on yields.
Q: Which maturities will the Fed buy?
A: The Fed will buy across the curve in proportion to outstanding (government debt), but it will include bills. I don’t think they will overweight bills by a lot, since it would be interpreted hawkishly. But I do think that the Fed’s portfolio (which is a duration of eight years) will fall to the duration of the Treasury market of six years.
Q: How will the Fed’s buying affect asset classes?
A: I do see a steeper yield curve as the Fed buys more in the front and also as the Fed lets inflation run. As for trades, I like steepeners, TIPS BE (break-even) wideners. I also recommend swap spread wideners.
((This interview was conducted in the Reuters Global Markets Forum, a chat room hosted on the Eikon platform.))
Reporting by Michael Connor in New York; Editing by Jennifer Ablan and Lisa Shumaker