From Morgan Stanley:
How much will they buy? A wide range of options appear to be on the table, but based on the signals provided by Sack and other officials, it looks like the Fed is converging on a flexible approach that will involve a specified amount of buying (perhaps $100 billion) that would occur prior to the December FOMC meeting, with the amount scaled up or down from there at future meetings depending on economic and financial market conditions. Indeed, even a policymaker as dovish as Rosengren appears to favor such a gradualist approach. This pace of buying would be roughly in line with our estimated budget deficit ($1.15 trillion) for fiscal 2011. So, the Fed would be absorbing virtually all of the net new Treasury issuance as long as they maintained this pace of purchases.
Will the Fed continue to buy across the curve or will it focus its purchases at the long end of the market? This is a major source of uncertainty for the markets. We suspect that the Fed will stick with their current strategy of buying across the curve in order to maintain a 6- to 7-year average maturity of purchases. There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years. So, if the Fed were instead to concentrate its buying in this sector, it could have a powerful impact on long-term yields.
What about the 35% rule? The Fed has a self-imposed restriction that prohibits it from owning more than 35% of the outstanding amount of any individual Treasury security. But this rule can be waived at any time and thus does not represent a significant barrier to concentrated purchases.
Will they buy Treasuries only? Initially, the Fed is likely to stick to buying Treasuries, but over time it could scale into mortgage-backed securities. In particular, we suspect that the Fed may wind up targeting a gross amount of MBS holdings near $1 trillion. When the Fed surpassed this threshold in the first round of asset purchases, it appeared to trigger some significant dislocations in the MBS market.
What is the probability of an intermeeting move? From our standpoint, such action is unlikely but possible. The most obvious potential trigger is Friday's employment report. If the report is really bad (say, below 0 for private payrolls, for which we would assign about a 20% probability), then we would put the chance of an intermeeting move at about 33%. Combining these probabilities, we see maybe a 5-10% chance overall for an intermeeting move.
What will be the impact on the markets and the economy?
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How much will they buy? A wide range of options appear to be on the table, but based on the signals provided by Sack and other officials, it looks like the Fed is converging on a flexible approach that will involve a specified amount of buying (perhaps $100 billion) that would occur prior to the December FOMC meeting, with the amount scaled up or down from there at future meetings depending on economic and financial market conditions. Indeed, even a policymaker as dovish as Rosengren appears to favor such a gradualist approach. This pace of buying would be roughly in line with our estimated budget deficit ($1.15 trillion) for fiscal 2011. So, the Fed would be absorbing virtually all of the net new Treasury issuance as long as they maintained this pace of purchases.
Will the Fed continue to buy across the curve or will it focus its purchases at the long end of the market? This is a major source of uncertainty for the markets. We suspect that the Fed will stick with their current strategy of buying across the curve in order to maintain a 6- to 7-year average maturity of purchases. There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years. So, if the Fed were instead to concentrate its buying in this sector, it could have a powerful impact on long-term yields.
What about the 35% rule? The Fed has a self-imposed restriction that prohibits it from owning more than 35% of the outstanding amount of any individual Treasury security. But this rule can be waived at any time and thus does not represent a significant barrier to concentrated purchases.
Will they buy Treasuries only? Initially, the Fed is likely to stick to buying Treasuries, but over time it could scale into mortgage-backed securities. In particular, we suspect that the Fed may wind up targeting a gross amount of MBS holdings near $1 trillion. When the Fed surpassed this threshold in the first round of asset purchases, it appeared to trigger some significant dislocations in the MBS market.
What is the probability of an intermeeting move? From our standpoint, such action is unlikely but possible. The most obvious potential trigger is Friday's employment report. If the report is really bad (say, below 0 for private payrolls, for which we would assign about a 20% probability), then we would put the chance of an intermeeting move at about 33%. Combining these probabilities, we see maybe a 5-10% chance overall for an intermeeting move.
What will be the impact on the markets and the economy?
