Many have pondered why long-end yields have.....>

FED: Many have pondered why long-end yields have not risen despite the surge in

both issuance and risk asset prices in the last few months. TD points to the

"significant removal of duration by the Fed via QE", having removed $1.21trn of

10Y equivalent vs $1.07trn of Tsy issuance btwn March-July, leaving the market

with a net duration shortfall.

- This is set to change, with the Fed's current pace implying purchases of only

$250bn of 10y equiv for the rest of the year, vs $1.21trn in Tsy issuance.

- As such, TD sees the Fed extending purchase durations as it shifts from

'market functioning' QE to 'compressing term premium' QE. 

- The Fed's adoption of inflation-based fwd guidance in Sep will give scope to

extend its purchase maturity in similar way to QE3, with 20-30Yrs benefiting (as

Fed ownership of 10-20Yr sector is already very high, and limits apply).

- Currently, $80bln/month in buys = around $50bln 10-Yr equiv duration; but if

the QE3 duration profile is applied, that rises to $125bln/month equiv.

- TD thus expects 10-Yr yields to remain <1% through end-2021, with 10y real

rates falling to a new low of -150bps and long-end swap spreads widening.