Citrini Research said closer coordination between the U.S. Treasury and the Federal Reserve may create conditions for 30-year U.S. Treasury bonds to rise. The firm said the government could lean more heavily on short-term debt funding, cutting the supply of long-dated Treasuries. In Citrini’s view, changes in bank regulation, Treasury debt management and Federal Reserve balance-sheet policy are converging into what it described as a new “Treasury-Fed accord.” Under that setup, the Fed would shrink its balance sheet while commercial banks expand theirs. As the government issues fewer long-term bonds and more Treasury bills, banks would take in more short-term government debt. Citrini said a reduced supply of long-duration Treasuries could help push long-end yields lower. Based on that framework, the firm recommended a trade favoring 30-year Treasuries over 5-year notes, which would imply a narrowing in the yield spread between the two maturities.
Citrini Research said stronger coordination between the U.S. Treasury and the Federal Reserve could create conditions for gains in 30-year U.S. Treasuries by pushing the government toward more short-term debt financing and reducing the supply of long-dated government bonds.
The research firm said shifts in U.S. bank regulation, Treasury debt-management policy and Federal Reserve balance-sheet policy are converging into what it called a new “Treasury-Fed accord.” Under that framework, the Fed would reduce its balance sheet, while commercial banks would expand their own.
As the government cuts issuance of longer-term bonds and relies more on Treasury bills, banks would absorb more short-term government debt. Citrini said a smaller supply of long-term Treasuries could help lower long-end yields.
On that basis, the firm recommended that clients position for 30-year Treasuries to outperform 5-year Treasuries, implying a narrower yield spread between the two.
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