TD Securities: Not The WAM Extension You're Looking For

TD Securities note that "NY Fed's SOMA Manager Logan hinted at upcoming tweaks to the composition of the Fed's QE program. The aim is to better align the composition of QE to be relatively neutral to the Treasury debt outstanding so as not to affect market functioning. This is not a change to the stance of monetary policy and is not a deliberate extension of WAM (which the Fed has previously debated as an easing tool). Due to Treasury issuance decisions, the share of Fed buying in the 7- to 20-Year sector is lower than what the outstanding debt would imply. Meanwhile, the Fed is buying more than the outstanding share in the 2.25- to 4.5-Year sector and TIPS. Thus, we expect the Fed to make changes to its buying across sectors. The next schedule will be released on April 13. However, the impact on the Fed purchase schedule is not large and the stock of Fed holdings in that sector will only change slowly over time. 20-Year Treasuries richened 5bp on the 10s20s30s fly, the 5s30s curve flattened, and 10y TIPS breakevens fell about 2bp after the speech. This makes sense given that there will be more long-end purchases and fewer TIPS purchases. However, the magnitude of the shift is likely to be small. Further, macro drivers of the curve and TIPS BEs such as fiscal policy and Fed's FAIT are likely to be much more impactful than the technical adjustments to QE. We remain in 5s30s curve steepeners and look to buy dips in TIPS BEs."