Bank of America: If the Federal Reserve adjusts asset allocation, it may absorb 2 trillion US dollars of short-term government bonds in the next two years

Bank of America's latest analysis shows that the Federal Reserve's possible adjustment to its portfolio of U.S. Treasury bonds may lead to the central bank buying nearly $2 trillion of short-term Treasury bonds over the next two years, which is enough to absorb almost all the US Treasury's debt issuance during this period.
Mark Cabana and Katie Craig, strategists at Bank of America, expect the Fed to better match its balance sheet by adjusting its asset portfolio, a move that both protects against interest rate risk and negative equity risk and shortens the duration of liabilities. For the Treasury, this is tantamount to a timely rain. After the debt ceiling was raised, the Treasury is issuing a large amount of short-term debt to fill the widening deficit and replenish the cash balance.
"If you do some extrapolation of the Fed's balance sheet and assume reinvestment of mortgage-backed securities into short-term Treasuries and conversion of maturing Treasuries into short-term Treasuries, it would be about $1 trillion," Cabana, head of US interest rate strategy at Bank of America, said in an interview. "The magic is that the Treasury is just about to issue 1 trillion dollars of short-term Treasuries, and the Fed just needs to buy them. This creates a whole new demand in the short-term Treasury market."