Goldman: Fed Tilt Could Support Long End, But May Not Be Forthcoming

Goldman Sachs note that "with the Fed's adoption of flexible average inflation targeting, focus has shifted to potential changes to forward guidance and asset purchases. Changes to the asset purchase program, as we've previously noted, include tilting purchases towards longer maturities. Fed QE over the past two months had an average duration of slightly over 6 years, running around $50bn in 10y equivalents. Taking down front end shares from 40% to about 5% and redistributing that amount pro-rata across the curve would take the average duration to about 9 years, and moving fully to a QE3-style distribution would take it towards 11.5 years. The latter would reduce the monthly UST duration supply net of Fed purchases, which we had estimated to exceed $200bn in 10y equivalents per month (assuming the current purchase profile) to levels above, but more comparable to, duration supply levels pre-COVID. However, our economists don't expect changes to either forward guidance or QE to be announced at the FOMC meeting. Indeed, given that long-end yields are relatively low, markets aren't pricing normalization until far in the future, and overall financial conditions have eased substantially, the Fed may not be in a hurry to make these changes."