Morgan Stanley: 35% Chance Of Tsy Duration Extension In Dec

Morgan Stanley see a 35% chance that the Fed extends asset purchase durations at the Dec FOMC, with the decision "tightly linked to the evolution of financial conditions between now and the meeting".

• If the Fed does act, they see a similar maturity extension program to 2011-12, perhaps with a higher weighing of 10-20 Yr Tsys (given introduction of the 20-Yr).
• News last week that the 13-3 lending facilities would expire at end-year increases the probability of a duration extension move in December, but MS notes how little financial conditions have changed since Tsy Sec Mnuchin's announcement. This limits the potential mon pol impact of a duration shift.
• Indeed, they see Tsys as already largely pricing in about a 35% probability of WAM extension in line with their view.
• Per MS, there will be wrangling over the interpretation of the existing 13-3 legislation in terms of what the Fed can still do / how much capital needs to be returned to Treasury by end-year etc, but clearly the majority of the facilities "will no longer be operational, at least for a time, and a prospective Biden administration would face either legal or Congressional hurdles in order to have them restarted."
• As such, policy is positioned "to be more reactive than proactive", as it could require Congressional appropriation to provide funds to restart the facilities, and that in turn may first require the economy to substantially deteriorate.