The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
With US non-financial companies still showing strong demand for cash, short-term markets remain jittery. In April, the Fed is likely to pursue CPFF and QE expansion. While the BOK will likely maintain the key rate at the April MPC meeting, an increase in KTB purchases is anticipated.
Fed resumes unlimited QE, with speed adjustments
While the Fed has reinitiated unlimited quantitative easing, the amount of treasury and MBS purchases was scaled down after just a week of infinite QE—a development we attribute to repo yield stabilization within range of the FF rate amid end-quarter demand for funds. However, the Fed’s reduced purchasing is unlikely to become a trend, given the ongoing liquidity crunch.
In April, Fed to increase QE purchasing once again
Despite the Fed’s unlimited QE, the Libor-OIS spread has remained significant due to cash demand from non-financial companies, which have been pulling their funds from prime MMFs, a move which has driven a massive sell-off in commercial paper (CP). In turn, the difficulty in sourcing funds from CP is increasing interbank transactions for the purpose of dollar procurement, a factor which is driving up Libor rates. We note that while the size of the Fed’s CPFF is estimated at around US$100bn, the outflow from prime MMFs has reached US$107bn since mid-February. Against this backdrop, we believe the Fed has no choice but to expand the scale of the CPFF and re-increase the scope of its treasury purchases.
BOK to buy more KTBs
At the April MPC meeting, the BOK is expected to freeze the key interest rate. However, with the outlook for tax revenue on the decline amid discussions over a second supplementary budget (after the general election), the government will almost certainly turn to the issuance of deficit-financing KTBs. Accordingly, we expect the BOK to purchase additional KTBs in order to ease supply-demand burden. Believing that the unique supply-demand risks of the won-denominated bond market will ease going forward, we adhere to our recommendation of buying long-term KTBs.