Wells Fargo's Boris Rjavinski......>

US TSYS/RESEARCH: Wells Fargo's Boris Rjavinski and Michael Schumacher eye the

Fed's balance sheet situation, calling it "more balance, less sheet" as Fed

"edges closer to reinvestment policy change. This week's FOMC has confirmed that

the Fed may reduce its balance sheet quickly. The cottage industry of Fed

language parsers jumped on the sentence "the Committee expects to begin

implementing its balance sheet normalization program relatively soon" 

- They estimate Fed "may reinvest less than 50% of maturing Treasury principal

in 2018, if they announce the change in September and begin "tapering" in

October. How will the mkt react? The distribution of the current Fed purchases

argues for a modest bear-flattening move in intermediate curves, since the Fed

is buying nearly four times as much 5s as 10s." They add "furthermore, the long

end of the Treasury curve has responded to the apparent approach of balance

sheet reductions with a robust flattener. We suspect that the 'stock theory' may

influence the action in the long end curves at the moment. The Fed ownership

share of the Treasury mkt is highest in the long-maturity sector at about 35% at

present, with the 3-6y sector a distant second at about 22%," they say.