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Goldman: Near-Term Risk To UST Spreads From Japan MoF Should Be Contained

US SWAPS

Goldman Sachs suggest that “intervention by Japan’s MoF has brought forth concerns of potential Treasury sales as result of the action (and potential for further intervention).”

  • “While understandable, particularly given the spread tightening that ensued following the CNY devaluation in August 2015, we believe the near-term risk to Treasuries is limited.”
  • “Japan’s reserve portfolio has a substantial liquidity position. This is a readily accessible pool to draw on that avoids the potential challenges of having to sell securities in an environment of already poor market liquidity. Fed balance sheet information (custody holdings and foreign repo pool) may offer a first hint on this, with MoF reports in early October to give more clarity if indeed.”
  • “Second, the creation of the Fed’s FIMA facility in 2020 provides another avenue for raising dollar liquidity in the event that it has drawn down its liquidity buffer.”
  • “Over time it’s likely that Japan would look to rebuild the liquidity position of the reserve portfolio, either via active sales or by not reinvesting maturing securities, but the key for market function is that ought to be able to happen in a somewhat less concentrated.”
  • “Over time the incremental reduction in demand that this implies should bias swap spreads (likely at shorter maturities) tighter, but in a more gradual fashion.”
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Goldman Sachs suggest that “intervention by Japan’s MoF has brought forth concerns of potential Treasury sales as result of the action (and potential for further intervention).”

  • “While understandable, particularly given the spread tightening that ensued following the CNY devaluation in August 2015, we believe the near-term risk to Treasuries is limited.”
  • “Japan’s reserve portfolio has a substantial liquidity position. This is a readily accessible pool to draw on that avoids the potential challenges of having to sell securities in an environment of already poor market liquidity. Fed balance sheet information (custody holdings and foreign repo pool) may offer a first hint on this, with MoF reports in early October to give more clarity if indeed.”
  • “Second, the creation of the Fed’s FIMA facility in 2020 provides another avenue for raising dollar liquidity in the event that it has drawn down its liquidity buffer.”
  • “Over time it’s likely that Japan would look to rebuild the liquidity position of the reserve portfolio, either via active sales or by not reinvesting maturing securities, but the key for market function is that ought to be able to happen in a somewhat less concentrated.”
  • “Over time the incremental reduction in demand that this implies should bias swap spreads (likely at shorter maturities) tighter, but in a more gradual fashion.”