Bank of America(US:BAC) Zhong Guo Ji Jin Bao·2025-08-17 02:15Core Viewpoint - The adjustment of the Federal Reserve's asset portfolio could potentially provide the Treasury with $2 trillion in funding over the next two years through the purchase of short-term Treasury bills [2]. Group 1: Federal Reserve's Asset Portfolio Adjustment - According to Bank of America, the Federal Reserve is expected to adjust its investment portfolio to better match its assets and liabilities, thereby reducing interest rate risk and negative equity [2]. - The adjustment could lead to a significant demand for short-term Treasury securities, as the Fed may reinvest maturing mortgage-backed securities and long-term Treasury bonds into short-term debt [2][3]. - If the Fed reallocates nearly 50% of its assets to short-term Treasury bills, it would align better with its short-term liabilities and help absorb fluctuations in the Treasury's cash balance [2]. Group 2: Impact on Treasury Issuance - The estimated supply of short-term Treasury bills is projected to be $825 billion for fiscal year 2026 and $1.067 trillion for fiscal year 2027, assuming the Treasury maintains its long-term bond auction size until October 2026 [2]. - This shift in the Fed's strategy is expected to ensure strong market demand for short-term government debt, alleviating concerns about liquidity issues due to large-scale Treasury issuance [3]. Group 3: Federal Reserve's Current Operations - The Federal Reserve is currently in a quantitative tightening phase, but recent discussions among policymakers suggest a potential shift in strategy regarding asset composition [3]. - The Fed's System Open Market Account (SOMA) has been under operational pressure due to negative net income, as interest payments on reserves exceed income from bond holdings [3]. Group 4: Methods for Increasing Short-Term Treasury Holdings - The Federal Reserve can quickly increase its holdings of short-term Treasury bills through several methods, including reinvesting maturing mortgage-backed securities and increasing reserve balances [4]. - Monthly purchases could range from $10 billion to $600 billion, depending on the strategy employed [4]. Group 5: Future Projections - Bank of America analysts expect the Federal Reserve to conclude its balance sheet reduction by December 2025 and subsequently begin adjusting its reinvestment strategy [5].