Fed to extend duration of their purchases in near future – TDS

TD Securities analysts said in a recently published report that they believe the Federal Reserve will extend the duration of their purchases in the near future.

Key quotes

"Indeed, the Fed has already started to hint at a shift in their thinking about QE — from market functioning to compressing term premium. This could be accomplished through greater purchases of long-duration securities in lieu of the front-end. This is also consistent with prior QE programs, where the Fed bought greater amounts of longer-duration Treasuries."

"We expect the Fed to conclude its framework review by September and also undertake explicit forward guidance, linking rate hikes to PCE inflation reaching or overshooting 2%. This will also allow the Fed to begin to extend the maturity of purchases."

"We expect buying as a share of the debt outstanding across the curve to be similar to QE3. Given that the 10-20y sector has a heavy share of Fed holdings, we expect the 20-30y sector to see more Fed buying. Not only will more traditional QE help stabilize long-end rates, but it will help further compress real yields and widen breakevens. We could see 10y real rates decline to a low of -150bp. QE should also widen long-end swap spreads."