North America Fixed Income Strategy12 January 2024J P M O R G A Nwww.jpmorganmarkets.comFixed Income StrategyJay Barry AC(1-212) 834-4951john.f.barry@jpmorgan.comJ.P. Morgan Securities LLCMichael Feroli AC(1-212) 834-5523michael.e.feroli@jpmorgan.comJPMorgan Chase Bank NASrini Ramaswamy AC(1-415) 315-8117srini.ramaswamy@jpmorgan.comJ.P. Morgan Securities LLCTeresa Ho AC(1-212) 834-5087teresa.c.ho@jpmorgan.comJ.P. Morgan Securities LLCNick Maciunas AC(1-212) 834-5671nicholas.m.maciunas@jpmorgan.comJ.P. Morgan Securities LLCPhoebe White(1-212) 834-3092phoebe.a.white@jpmorgan.comJ.P. Morgan Securities LLCIpek Ozil(1-212) 834-2305ipek.ozil@jpmorgan.comJ.P. Morgan Securities LLCAfonso Borges(1-212) 834-4349afonso.borges@jpmorgan.comJ.P. Morgan Securities LLCLiam L Wash(1-212) 834-5230liam.wash@jpmchase.comJ.P. Morgan Securities LLCPhilip Michaelides(1-212) 834-2096philip.michaelides@jpmchase.comJ.P. Morgan Securities LLC•Given the nascent discussion on slowing and stopping QT in the December FOMC minutes, and new information from Fed leadership in recent days, we re-evaluate our own projections. •We now expect that the FOMC will have the outline of a timeline at the January meeting, communicated mid-February minutes to that meeting. We expect that this plan will be formally agreed to at the mid-March meeting and will be implemented beginning in April.•We look for the monthly cap on the runoff of Treasury securities to be reduced to $30bn/mo (down from $60bn/mo) and we expect no change in the $35bn/mo cap on mortgages. •We think the Fed could be targeting reserves closer to a 10% share of nominal GDP, and we envision QT concluding at the end of November, while ON RRP balances remain large enough to affect smooth functioning of money markets--even while reserves remain somewhat above most estimates of lowest comfortable level of reserves.•If our new forecast comes to fruition, it will result in $420bn in passive runoff of Treasuries from the Fed�s balance sheet in 2024, versus our prior $720bn forecast. Given the longer-term financing outlook, we think Treasury would be loath to deviate from its current path and not make further increases to coupon auction sizes, given increased financing needs in coming years. We now forecast $2.280tn in net-privately held borrowing needs in 2024, $300bn less than our prior projections, as net issuance of T-bills moderates to $377bn, versus $675bn previously.•Under our new QT forecast, this should result in $15bn in secondary market demand for Treasuries in 2024, and approximately $180bn in demand in 2025. This would help address the structural supply/demand imbalance in Treasury markets, but not much later this year.•If RRP balances end the year $200-300bn higher relative to previous expectations, our fair value model estimates this should push 2Y swap spreads wider 3-5bp all else equal, but front-end spreads are already trading wide relative to fai...
