LIVE MARKETS-Fed-Treasury Accord Would Have Minimal Market Impact, BofA Says

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

FED-TREASURY ACCORD WOULD HAVE MINIMAL MARKET IMPACT, BOFA SAYS

Speculation about a new Fed-Treasury accord has grown since former Fed Governor Kevin Warsh was tapped to replace Jerome Powell as Fed chair in May. Warsh suggested last year that such an agreement could smooth the Fed's balance sheet reduction by jointly communicating intentions.

Bank of America analysts led by Mark Cabana say any new accord would likely have minimal market impact, noting the Fed and Treasury already coordinate during crises.

Client inquiries to the bank on the topic have focused on three areas: Fed balance sheet management and Treasury issuance, quantitative easing limits, and coordination during periods of stress.

BofA expects Fed-Treasury coordination through three main channels, which is likely already priced in. These are Fed MBS rolloff, which would likely be absorbed by GSEs, Fed bill buying via reserve management purchases that Treasury would issue into, and the Fed shortening its Treasury holdings' Weighted Average Maturity. This would drop the total U.S. Treasury market's WAM and would not be offset.

The agencies could also agree on QE limits, restricting Fed balance sheet independence, though "in practice, it likely won't matter; UST Sec should approve Fed QE if conditions warrant," BofA said.

As for stress-period coordination, "in practice, this already happens," the bank noted. During major shocks, the Fed typically cuts rates to zero while Treasury relies heavily on bills.

(Karen Brettell)

EARLIER ON LIVE MARKETS:

BLAME IT ON BLIZZARDS: JOBLESS CLAIMS, EXISTING HOME SALES CLICK HERE

US STOCKS MIXED OUT OF THE GATE CLICK HERE

BENCHMARK TREASURY YIELD: TRADERS STILL BRACED FOR WHAT COULD BE A BIG MOVE CLICK HERE

MONEY MANAGERS' AI-DRIVEN SELLOFF OVERDONE, SAYS MORGAN STANLEY CLICK HERE

SHARE REPURCHASES TO PROVIDE RENEWED SUPPORT FOR EUROPE CLICK HERE

ASSET MANAGERS BUYING FRANCS AT FASTEST PACE IN 10 YEARS, SAY UBS CLICK HERE

STOXX 600 HITS NEW RECORD, BEATEN DOWN STOCKS HAVE BRIGHTER START CLICK HERE

EUROPE BEFORE THE BELL: STOCKS SET FOR EARNINGS, M&A BOOST CLICK HERE

JOBS IN REARVIEW, EARNINGS NEXT CLICK HERE