/CORPORATES: BA/ML corporate bond...........>

US TSYS: /CORPORATES: BA/ML corporate bond analysts said "QT (Quantitative

Tightening) plus tax reform plus financial deregulation equals OK." They quipped

"we know QE as the source of all good in financial markets. Now Fed quantitative

tightening (QT) is unwinding that, which is scary and uncharted territory. There

are (at least) 2 key negative impacts on the corporate bond market."

- "First, the Fed will be buying less Treasuries and MBS, and any resulting

weakness could spill over into the corporate bond market," they said. "Second,

as the Fed winds down its securities portfolio, they will be removing US$

reserves from the system, and thus if demand does not decline, tighten US$

funding conditions in the international mkts. That would make it more expensive

for foreign investors to hedge US$ risk via more negative cross-currency basis

swaps."

- "However we think 2 negatives are more than mitigated by concurrent tax reform

and fincl deregulation, respectively. Should that against our expectation be

insufficient any upward pressure on US interest rates will be met by large

foreign inflows, which limits int. rate volatility," they said.