Bank Of America: Still In Widening Camp For Swap Spreads

Bank of America note that "in our year ahead outlook we reiterated our spread widening views across the curve with targets of 13bp on 2y and -10bp on 30y spreads. While spreads have widened across the curve, we think forces are still aligned for further widening."

• "The front end spread story boils down to too much cash chasing too few assets. This is a function of the Federal Reserve's ongoing QE and an expected decline in the Treasury Department's cash balance at the Fed. Near-term COVID relief and associated bill supply is unlikely to change this dynamic."
• "Liability-driven investors (LDI) could be the swing factor this year for long end spreads. Treasury demand should be generated by migration out of LIBOR markets into Treasuries and other alternatives, and LDI duration demand in a rising rate environment, which we think will also be biased against swaps and towards various forms of Treasury risk."
• "Other important drivers for spreads this year we think will be Treasury supply and expected deficits, taper threats and Fed QE, regulations, corporate supply, foreign demand, and convexity paying. We think the spread widening forces outweigh the tightening factors."