Wall Street Reviews "400 Billion Debt Purchase": The Federal Reserve Returns as the "Number One Buyer" of US Debt, Easing Financing Pressure, and Trading Opportunities Such as Interest Rate Swaps to Welcome Tailwinds.

The Federal Reserve's plan to purchase $400 billion in Treasury bonds each month has prompted revisions in Wall Street banks' forecasts for 2026 debt issuance and has led to a decrease in borrowing costs. The Federal Reserve will start buying Treasury bonds to alleviate short-term interest rate pressures by rebuilding reserves in the financial system. Some banks estimate that the Federal Reserve may purchase nearly $525 billion in Treasury bonds in 2026. Strategists expect that these purchases will help alleviate market pressures and benefit swap spreads and SOFR-Federal Funds Rate spread trades, but may not completely eliminate market volatility, especially around year-end. Previously, the Federal Reserve announced a plan to purchase $400 billion in Treasury bonds each month, a larger scale than previously expected, prompting a series of revisions in Wall Street banks' 2026 debt issuance forecasts and resulting in lower borrowing costs. The Federal Reserve stated that it would begin buying Treasury securities on Friday in an effort to lower short-term rates by rebuilding reserves in the financial system. Barclays Bank estimates that the Federal Reserve may ultimately purchase nearly $525 billion in Treasury bonds by 2026, compared to the previous forecast of $345 billion; meanwhile, the net issuance of Treasury securities to private investors is expected to be only $220 billion, down from the previous forecast of $400 billion. JPMorgan and Credit Suisse also believe that the Federal Reserve will absorb more debt. Bank of America expects that the Federal Reserve may need to maintain a higher pace of bond purchases for a longer period of time to increase adequate reserves and stabilize money market rates. In addition to the Federal Reserve's plan to start purchasing $144 billion in Treasury securities in December, its Reserve Management Operations (RMP) will reinvest the proceeds from gradually unwinding agency debt holdings after it stopped tightening its investment portfolio on December 1. Strategists say these measures will help alleviate the pressure that has been building up for months from the Federal Reserve reducing its asset holdings. They expect that this bond purchase will boost swap spreads and SOFR-Federal Funds Rate spread trades. Short-term rate futures trading spiked on Wednesday, with the two-year swap spread widening to its highest level since April, indicating some relief from short-term market pressure. However, strategists at the Canadian Imperial Bank of Commerce say that these measures cannot completely eliminate volatility, as the Federal Reserve's purchase amount in December is unlikely to exceed overnight funding needs, which often accumulate around year-end as banks restrict repo market activities to shore up their balance sheets. Here are the views of Wall Street banks: Bank of America Strategists believe that there is a risk of an extended period of maintaining a higher pace of bond purchases because by mid-April, RMP can only increase cash reserves by $80 billion on the basis of natural liability growth, while the Federal Reserve needs to increase by $150 billion to achieve the desired result. If the Federal Reserve believes that bond investors are "adversely affected," they will switch to issuing three-year US Treasury bonds to limit their outflows. The Federal Reserve's balance sheet operations reinforce the core spread view: long on 1y1y SOFR Federal Funds Rate, long on 2-year asset swap spreads. Barclays Bank The Federal Reserve's aggressive measures indicate a "very low tolerance" for funding pressures. In the coming months, the Federal Reserve will be the main buyer of US Treasury bonds, expected to purchase around $55 billion in December and maintain this high level in the first quarter, then reduce purchases to an expected $25 billion per month in Aprilhigher than the previous forecast of $15 billion per month. This means the Federal Reserve may purchase nearly $525 billion in Treasury securities in 2026, above the previous forecast of $345 billion, so the net issuance to private investors will decrease from the previous forecast of $400 billion to only $220 billionfurther alleviating Treasury supply pressures. Deutsche Bank The Federal Reserve's early implementation of monetary policy shows greater caution in transitioning to abundant money supply compared to 2019. This should help further stabilize the repo market, which should benefit SOFR Federal Funds Rate and front-end swap spreads. JPMorgan Expects the Federal Reserve to maintain the $400 billion monthly bond purchase pace until mid-April, then slow down to $200 billion per month. With about $150 billion in monthly mortgage-backed securities (MBS) repayments reinvested, the Federal Reserve will purchase about $490 billion in Treasury securities in 2026 in the secondary market, above the previous forecast of $280 billion; current net issuance of Treasury securities is expected to be only $274 billion. The early announcement of possible bond purchases is preemptive, indicating the Federal Reserve's concern about market volatility. RBC Capital Markets The institution admits it underestimated the Fed's unease at the level of intramonth repo volatility and believes the Fed will reinvest in mortgage-backed securities before ramping up purchases further. Expects the minimum monthly purchase amount to be $20 billion to $25 billion to align with natural demand. It seems this is more about absorbing Treasury issuance rather than increasing reserves. The Treasury is also conducting cash management repo operations to smooth out supply volatility, indicating that both institutions are "addressing" the same issue now. TD Securities Expects the Federal Reserve to purchase $425 billion in Treasury securities in the 2026 fiscal year through RMP and MBS reinvestment, which will account for most of the net supply. Maintaining a long position in 30-year swap spreads and expecting the swap spread curve to flatten, as near-month contracts lead the widening trend. UBS Bank Strategists still expect some funding pressure around year-end, as the Fed's proactive measures are encouraging but not a panacea, although market volatility may slightly decrease. The $400 billion scale is higher than expected, but the Fed has indicated that purchase sizes will be adjusted based on fluctuations in Fed borrowing needs. This is undoubtedly a "clear tailwind" for those betting on SOFR-Federal Funds Rate spreads and US swap spread widening. SMBC Nikko The Fed is trying to "actively manage excess bank reserves," and the success of this strategy will depend on market participants' willingness to use the standing repo facility. By the end of January, if bank reserves rise to above $3 trillion, SOFR will approachalthough possibly still abovethe IOER, and may cause the federal funds rate to drop by about 2 basis points. Overall, the Federal Reserve's bond purchases and the resulting impact on the market are closely watched by analysts and investors, as they seek to gauge the effects on borrowing costs, market stability, and overall economic conditions.