BofA: If the Fed adjusts its asset allocation, it may absorb $2 trillion in short-term government bonds over the next two years.

[BofA: If the Fed Adjusts Asset Allocation, It May Absorb $2 Trillion in Short-term Treasuries Over the Next Two Years] Bank of America's latest analysis shows that adjustments the Fed may make to its U.S. Treasury holdings could result in the central bank purchasing nearly $2 trillion in short-term Treasuries over the next two years, a scale that could almost absorb the entire amount of bonds issued by the U.S. Treasury during this period. Bank of America strategists Mark Cabana and Katie Craig expect that the Fed will better match its balance sheet structure by adjusting its asset portfolio, a move that can both mitigate interest rate risk and negative equity risk, while also shortening liability duration. For the Treasury, this is akin to a timely downpour—after the debt ceiling was raised, the Treasury is issuing a large amount of short-term debt to fill the widening deficit gap and replenish cash balances. "If we make some projections on the Fed's balance sheet, assuming the reinvestment of mortgage-backed securities is shifted to short-term Treasury bonds, while maturing Treasury bonds are also converted to short-term Treasury bonds, the scale will reach about $1 trillion," said Cabana, head of U.S. interest rate strategy at Bank of America, in an exclusive interview. "The magic is that the Treasury is just about to issue $1 trillion in short-term Treasury bonds, and the Fed just happens to need to purchase them. This brings a whole new demand to the short-term Treasury bond market."