On December 12, the Federal Reserve announced plans to purchase $40 billion in short-term Treasury securities per month, exceeding previous market expectations. This plan triggered a series of revisions to debt issuance forecasts for 2026 by major Wall Street banks and also drove down borrowing costs.
Barclays estimates that the Federal Reserve may eventually purchase close to $525 billion in short-term Treasury bonds in 2026, far exceeding its previous forecast of $345 billion. The Fed's aggressive moves demonstrate its "extremely low tolerance" for funding pressures.
JPMorgan Chase and TD Securities also believe the Federal Reserve will absorb a larger amount of debt. Bank of America, on the other hand, predicts that the Fed may need to maintain this rapid pace of purchases for a longer period in order to replenish sufficient reserves and stabilize money market interest rates.
Strategists say these measures will help ease market pressures that have built up over the past few months due to the Federal Reserve's tapering of its holdings. They expect these purchases to be a positive factor for swap spreads and SOFR-federal funds rate basis trading. On Wednesday, trading volume in short-term interest rate futures surged, and the two-year swap spread widened to its highest level since April, indicating some easing of short-term market pressures. (Jinshi)
