US Fixed Income Markets Weekly: The Fed decided to reinvest Agency MBS and debt paydowns into Treasuries; we expect about $284bn of incremental demand for Treasuries. While the Fed’s objective is to target a static balance sheet and stem the quantitative tightening that would otherwise occur, it is nonetheless a shift toward more accommodative monetary policy that defers its eventual exit strategy further. We now expect the Fed to remain on hold until 2Q12. Confronted with what might be the longest of all low-for-long regimes, the search for carry is likely to remain the dominant theme. We look for further declines in intermediate yields and a flatter curve. The quest for carry should benefit credit spreads as well, particularly given the backdrop of slower (but still likely positive) growth, tame inflation, a Fed on prolonged hold, and favorable supply demand technicals. Tactically overweight mortgages.
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