Bank of America (BofA) suggests that the Federal Reserve's Reserve Management Purchases (RMP) program will absorb a significant portion of net Treasury supply over the next year. If the U.S. Treasury opts to issue more short-term debt to offset the Fed's purchases, long-term bond supply could decrease, potentially lowering 10-year Treasury yields by 20 to 30 basis points compared to baseline levels.
BofA analysts, led by Mark Cabana, noted in a post-FOMC report that the Fed's RMP is expected to absorb most short-term Treasury issuance, forcing the Treasury to reconsider how to meet rising borrowing needs. The bank highlighted that the Treasury's decision on short-term debt issuance will directly impact long-term bond supply. Should the Treasury increase short-term issuance to compensate for Fed purchases, reduced long-term supply could exert downward pressure on benchmark 10-year yields.
BofA estimates this "duration-friendly supply-demand dynamic" could push 10-year yields 20-30 basis points below where they would otherwise trade. The magnitude depends on whether the Treasury further delays increasing long-term debt issuance and relies more heavily on short-term financing.
The bank projects the Treasury will begin increasing auction sizes for some long-term debt starting February 2027, a view widely shared on Wall Street. This week saw mixed performance in Treasuries, with long-end yields generally rising—the 10-year yield climbed nearly 3 basis points.
Wall Street has significantly revised its bond purchase expectations following the Fed's aggressive buying plan. Barclays strategists including Samuel Earl and Demi Hu now project the Fed could purchase approximately $525 billion in short-term Treasuries during 2026, up sharply from their prior $345 billion estimate. This would reduce net issuance available to private investors from $400 billion to $220 billion.
Barclays interprets the Fed's aggressive stance as demonstrating "very low tolerance" for funding stress, expecting elevated purchase volumes through Q1 2024 before tapering from $55 billion monthly (including MBS reinvestments) to $25 billion by April.
JPMorgan similarly raised forecasts, with strategists Jay Barry and Teresa Ho anticipating $40 billion monthly purchases through mid-April before tapering to $20 billion. Combined with roughly $15 billion in monthly MBS reinvestments, the Fed's total secondary market purchases could reach $490 billion in 2026, leaving net short-term Treasury issuance at just $274 billion.
Market risks exist, and investors should exercise caution. This analysis does not constitute personal investment advice nor account for individual financial circumstances. Investors should assess whether any opinions align with their specific situations before making decisions.
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