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SocGen’s house view as explained by its economist Michala Marcussen is that the Federal Reserve will announce $600bn of new asset purchases today at the FOMC meeting, split 40 per cent to 60 per cent between mortgage-backed securities (MBS) and US Treasuries.SocGen’s rates strategy team assigns a 70 per cent chance to this option. However, in a note to clients, head of fixed income strategy Vincent Chaigneau also lays out four alternatives the Fed could choose, albeit with lesser probabilities:
- The Fed doesn’t say anything (5 per cent chance). Chaigneau writes, “Disappointment among investors and fear that the Fed is falling behind the curve. Serves as an implied signal that the first Fed hike is not further delayed. 10-year Treasury yields (and implied rates volatility) initially push higher, but the sell-off quickly subsides as risk assets sell off.”
- A three month continuation of Operation Twist (10 per cent chance). Chaigneau writes that such an announcement “buys the Fed more time until the September FOMC meeting.” In this event, he thinks “10-year Treasury yields enter the 1.4-1.5% trading range, with the yield curve bull flattening.”
- QE3, but only for Treasuries — no MBS (10 per cent chance). This would also send Treasury yields down to a 1.4 to 1.5 per cent range, according to Chaigneau. In addition, he sees “Treasury yields dislocating vs swaps and corporates” in this scenario.
- “QE3 light” — only three months, only $100-150bn (5 per cent chance). Chaigneau writes, “This gives the Fed more flexibility to revisit at the September FOMC. Causes a mixed reaction with some market participants disappointed, while others are happy to see a continuation of QE. 10-year Treasury yield trading volatile in a 1.5-1.7% range.”